Benefits and Compensation

DOL Proposes Eased Restrictions on Open Multiple-Employer Plans for Small Businesses

The U.S. Department of Labor (DOL) on October 22 released its proposal easing restrictions on open multiple-employer plans (MEPs) to encourage more small businesses to offer defined contribution (DC) retirement plans to their employees.

The Notice of Proposed Rulemaking (NPRM) was published on October 23 (83 Fed. Reg. 53534). Public comments are due by December 24.

At the behest of an Executive Order (EO) signed August 31 by President Donald Trump, the proposed regulations would let small employers, sole proprietors, and professional employee organizations (PEOs) join “association retirement plans” or groups of businesses collectively offering 401(k) plans to their employees. Such arrangements already exist for companies with a union or industry connection.

A PEO is a human resource company that contractually assumes certain employment responsibilities for its client employers.

Under the proposed DOL rule, MEPs could be created by associations of employers in various cities, counties, states, or regions—or nationwide across an industry. The proposal states that such groups will now qualify as “employers” under the terms of the Employee Retirement Income Security Act (ERISA) for the purpose of setting up an individual employee pension plan.

IRS Reviewing ‘One Bad Apple’ Rule

Separately, the Internal Revenue Service (IRS) is said to be reviewing the “one bad apple” rule relating to MEPs, although that provision was not included in the new DOL proposal. Under this longtime rule, one employer can put an entire MEP’s tax qualification at risk by, for example, failing nondiscrimination testing.

There is currently no guidance explicitly creating a roadmap for MEP sponsors to deal with such qualification problems, though some providers have developed and implemented procedures to address the issue. Most legislation expanding MEPs includes a provision intended to fix the one bad apple rule.

RMD Changes Possible

Trump’s August EO further called on the U.S. Department of the Treasury and IRS to review within 180 days the required minimum distribution (RMD) rules to see if changes can be made to help retirees keep their savings in 401(k)s and IRAs longer. No provisions relevant to this request were included in the NPRM on open MEPs.

The Internal Revenue Code (IRC) generally requires that plan participants begin drawing on their retirement account balances at age 70½. The pace at which RMDs must be paid is set forth in life expectancy tables contained in Treasury regulations dating from 2002. The EO directs Treasury to consider updating these tables to reflect current mortality data and further stretch out the period over which RMDs are paid.

Rationale for Expanding MEPs

“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,” said DOL Secretary Alexander Acosta in an October 22 press release about the agency’s MEP proposal. “Association Retirement Plans give these employers a simple and less burdensome way to offer” retirement benefits, he added.

According to Acosta’s statement, approximately 38 million private-sector employees in the United States do not have access to a retirement savings plan through their employers. Association plans offer these workers improved savings opportunities, he said.

In 2018, about 85 percent of workers at private-sector establishments with 100 or more workers were offered a retirement plan but only 53 percent of workers at private-sector companies with fewer than 100 workers had access to such plans, according to the DOL’s preamble to the proposed rule.

The DOL said it expects the newly available MEPs to reduce administrative costs through economies of scale and to “strengthen small businesses’ hand when negotiating with financial institutions and other service providers.” Many service providers in the retirement plans community support MEPs as a way to address the gap in retirement plans at small businesses.

The DOL contact for the NPRM on association retirement plans is Mara S. Blumenthal, Office of Regulations and Interpretations, Employee Benefits Security Administration (EBSA), reachable at 202-693-8500.

Jane Meacham is the editor of BLR’s retirement plan compliance publications. She has nearly 30 years’ experience as a writer/editor of financial services news.