DOL Puts Forward Multiple-Employer 401(k)s

Proposal would let employers join in a shared 401(k) association health plan

Stephen Miller, CEBS By Stephen Miller, CEBS October 24, 2018
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The U.S. Department of Labor (DOL) is proposing a regulatory fix that would allow more employers to share a single 401(k)-type plan, reducing costs and administrative duties that each employer would otherwise bear alone. This approach could help small businesses that don't provide employees with a retirement plan to start offering this benefit. Meanwhile, Congress continues to consider legislation that aims to do even more to ease the use of multiple-employer defined contribution retirement plans.

The proposed rule, published in the Federal Register on Oct. 23, would let businesses join together to offer 401(k) plans through association retirement plans (ARPs) and other multiple-employer plans (MEPs), such as those sponsored by professional employer organizations (PEOs) that contractually assume certain employment responsibilities for their client employers.

The DOL is accepting comments on its proposed rule through Dec. 24, 2018.

"Many small businesses would like to offer retirement benefits to their employees but are discouraged by the cost and complexity of running their own plans," stated U.S. Secretary of Labor Alexander Acosta. "Association retirement plans give these employers a simple and less burdensome way to offer valuable retirement benefits to their employees."

"Expanding the availability of association retirement plans is a positive step—more workers will have access to a retirement savings vehicle and more employers, especially smaller employers who could not otherwise afford the administrative costs, will be able to provide this key benefit," said Nancy Hammer, vice president for regulatory affairs and judicial counsel at the Society for Human Resource Management.

Approximately 38 million private-sector employees in the U.S. do not have access to a retirement savings plan through their employers, according to the DOL, which cited administrative costs and compliance requirements as the chief reasons why small businesses don't offer a retirement-savings benefit.

Survey findings confirm that view. Among small business owners who don't offer 401(k) plans, 59 percent said their business was too small to set one up, while 16 percent believed plan costs were too high, according to a May 2017 survey on behalf of Capital One, a financial services firm. The Spark 401k Survey polled 500 U.S. business owners at companies with 50 or fewer employees.

Restrictions Eased

Under current DOL rules, only "closed" MEPs are allowed; participating employers have to share common organizational relationships such as membership in an established trade association. The proposed DOL rule would make it easier for small employers in different industries to partner in a shared plan:

  • ARPs could be offered by associations of employers in a city, county, state or multistate metropolitan area, or in a particular industry nationwide.

Association members would not need to share a common interest as long as they operate in a common geographic area. Meanwhile, associations whose members operate in the same industry could sponsor ARPs regardless of where their members are located.

  • Sole proprietors, as well as their families, would also be permitted to join such plans.

"Gig economy workers, in particular, may face obstacles to saving for retirement," the proposal states. "While a number of tax-preferred retirement savings vehicles are already available to them, many might find it difficult and expensive to navigate these options on their own."

The employers would not be viewed as sponsoring their own plans under the Employee Retirement Income Security Act (ERISA). Rather, the ARP—or PEO-sponsored MEP—would be treated as a single employee benefit plan for purposes of ERISA. The ARP or MEP sponsor, and not the participating employers, would generally be responsible, as plan administrator, for complying with ERISA's reporting, disclosure and fiduciary obligations.

"By expressly permitting these new plan arrangements, the proposal would enable small businesses to offer benefit packages comparable to those offered by large employers," the DOL stated.

Defined contribution MEPs should not be confused with multiemployer defined benefit pension plans, sometimes called Taft-Hartley plans, which are collectively bargained pensions, typically within the same industry and often managed by a labor union.

[SHRM members-only toolkit: Designing and Administering Defined Contribution Retirement Plans]

Legislation Before Congress

In September, the U.S. House of Representatives passed the Family Savings Act, which would let unrelated small employers partner in a common MEP.

The "open" MEP provisions in the Family Savings Act are similar to those in a bill that the Senate is expected to vote on, the Retirement Enhancement and Savings Act (RESA). If the Senate passes RESA before year-end, a committee from both chambers is expected to reconcile the two bills into a compromise measure, which then would become law if Congress approves it before Dec. 31.

"The legislative proposals go much farther to allow [fully] open MEPs" that could be sponsored by associations whose members are unrelated by either industry or location, said Dominic DeMatties, a partner in the Washington, D.C., office of law firm Alston & Bird.

"This had been an area that was murky under ERISA because it often would not be clear who the government would view as the employing entity under such plans," said Steven Friedman, a shareholder in law firm Littler's New York office.

DeMatties described the proposed changes as "pretty close to as far as DOL could go" to interpret ERISA's definition of plan sponsor absent new legislation.

A legislative alert from Buck, an HR consultancy, noted, "Although it is unlikely that the House and Senate will finish work on a conference before the elections in November, observers seem confident that Congress will come to agreement by year end."

If open MEPs were to be created through legislation, they could only be rescinded if Congress passes a subsequent law that does so, whereas a future administration could rescind and replace MEPs regulations.

Fiduciary Issues

Fiduciary liability may be reduced for participating employers, as the proposal permits the designation of a named fiduciary "who will have the responsibility for some but not all fiduciary requirements," Friedman noted.

However, "still missing from these proposals is the ability of each employer to be responsible only for its plan administration," he said, leaving the so-called bad apple rule still part of the structure of these plans. "This means that the administrative error of one sponsoring employer may upset the qualified status of the plan for all employers," Friedman explained.

The proposed legislation now before Congress "goes further to clarify that adopting employers that participate in a MEP would retain only limited fiduciary obligations," DeMatties said. The "bad apple" rule also would be addressed if these bills are enacted.

"The bottom line is that we will need to await further legislative guidance in order to determine the value of the new multiple employer plan rules," Friedman said.

First Health, Now Retirement

In June, the DOL issued a final rule on association health plans (AHPs), intended to make it easier for small businesses to band together to buy health insurance. The DOL's proposal for ARPs and its final rule for AHPs rely on almost identical language to expand ERISA's definition of an "employer" permitted to sponsor a benefit plan. For instance, an association can now offer a shared AHP if members are in the same trade, industry or profession throughout the U.S., or are located in the same state or share a common metropolitan area, even if the metro area extends across state lines—the same language that the new proposal applies to ARPs.

Sole proprietors also are able to join AHPs.

"Some associations that have been interested in sponsoring AHPs may also be interested in sponsoring ARPs covering small companies, and more small companies could turn to PEO-sponsored plans," wrote attorney Jeff Belfiglio, a partner with Davis Wright Tremaine in Bellevue, Wash. "But real growth in the area is not expected until financial firms are able to offer 'open MEPs' to any employers who want to participate and pool their plan assets."


Related SHRM Articles:

DOL’s Final Rule on Association Health Plans Expands Options, SHRM Online, June 2018

New Push Seen for 401(k) Multiple Employer Plans, SHRM Online, May 2017


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