# Definition of “Employer” Under Section 3(5) of ERISA-Association Retirement Plans and Other Multiple-Employer Plans

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2018-23065

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** October 23, 2018
- **Citation:** 83 FR 53534

## Text

DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2510
RIN 1210-AB88
Definition of “Employer” Under Section 3(5) of ERISA—Association Retirement Plans and Other Multiple-Employer Plans

AGENCY:

Employee Benefits Security Administration, Department of Labor.

ACTION:

Proposed rule.

SUMMARY:

The Department of Labor proposes a regulation under title 29 of the Code of Federal Regulations to expand access to affordable quality retirement saving options by clarifying the circumstances under which an employer group or association or a professional employer organization (PEO) may sponsor a workplace retirement plan. In particular, the proposed regulation clarifies that employer groups or associations and PEOs can, when satisfying certain criteria, constitute “employers” within the meaning of section 3(5) of ERISA for purposes of establishing or maintaining an individual account “employee pension benefit plan” within the meaning of ERISA section 3(2). As an “employer,” a group or association can sponsor a defined contribution retirement plan for its members, as can a PEO sponsor a plan for client employers (collectively referred to as “MEPs” unless otherwise specified). The proposed regulation would allow different businesses to join a MEP, either through a group or association or through a PEO. The proposal would also permit certain working owners without employees to participate in a MEP sponsored by a group or association. The proposal would primarily affect groups or associations of employers, PEOs, plan participants, and plan beneficiaries. The proposal would not affect whether groups, associations, or PEOs assume joint-employment relationships with member-employers or client employers. But the proposal may affect banks, insurance companies, securities broker-dealers, record keepers, and other commercial enterprises that provide retirement-plan products and services.

DATES:

Comments are due by December 24, 2018.

ADDRESSES:

You may submit written comments, identified by RIN 1210-AB88, by one of the following methods:

•
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.

•
Mail:
Office of Regulations and Interpretations, Employee Benefits Security Administration, Room N-5655, U.S. Department of Labor, 200 Constitution Ave. NW, Washington, DC 20210, Attention: Definition of Employer—MEPs RIN 1210-AB88.

Instructions:
All submissions must include the agency name and Regulatory Identifier Number (RIN) for this rulemaking. If you submit comments electronically, do not submit paper copies. Comments will be available to the public, without charge, online at
http://www.regulations.gov
and
http://www.dol.gov/agencies/ebsa
and at the Public Disclosure Room, Employee Benefits Security Administration, Suite N-1513, 200 Constitution Ave., NW, Washington, DC, 20210.

Warning:
Do not include any personally identifiable or confidential business information that you do not want publicly disclosed. Comments are public records posted on the internet as received and can be retrieved by most internet search engines.

FOR FURTHER INFORMATION CONTACT:

Mara S. Blumenthal, Office of Regulations and Interpretations, Employee Benefits Security Administration, (202) 693-8500. This is not a toll-free number.

SUPPLEMENTARY INFORMATION:

A. Overview and Purpose of Regulatory Action

Expanding access to workplace retirement plans is critical to helping more American workers financially prepare to retire. Approximately 38 million private-sector employees in the United States do not have access to a retirement plan through their employers.
1

According to the U.S. Bureau of Labor Statistics, 23 percent of all private-sector, full-time workers have no access to a workplace retirement plan.
2

The percentage of private-sector workers without access to a workplace retirement plan increases to 32 percent when part-time workers are included.
3

1
This number was estimated by the U.S. Department of Labor's Employee Benefits Security Administration using statistics from the U.S. Bureau of Labor Statistics,
National Compensation Survey: Employee Benefits in the United States, March 2018
(
www.bls.gov/ncs/ebs/benefits/2018/employee-benefits-in-the-united-states-march-2018.pdf
). According to Table 2 (entitled Retirement Benefits: Access, Participation and Take-up rates, Private Industry Workers) of this survey, approximately 68% of private-sector industry workers have access to retirement benefits through their employers in 2018. According to Appendix Table 2, the survey represents approximately 118.1 million workers in 2018. Thus, the number of private industry workers without access to retirement plans through their employers is estimated to be approximately 38 million ((100%−68%) × 118.1 million).

2

U.S. Bureau of Labor Statistics, National Compensation Survey: Employee Benefits in the United States, March 2018 at Table 2 (entitled Retirement Benefits: Access, Participation and Take-up rates, Private Industry Workers). The survey is available at
(
www.bls.gov/ncs/ebs/benefits/2018/employee-benefits-in-the-united-states-march-2018.pdf
).

3

Id.

Small businesses are less likely to offer retirement benefits. In 2018, approximately 85 percent of workers at private-sector establishments with 100 or more workers were offered a retirement plan. In contrast, only 53 percent of workers at private-sector establishments with fewer than 100 workers had access to such plans.
4

Contingent or temporary workers are less likely to have access to a workplace retirement plan than those who are traditionally employed.
5

Access to an employment-based retirement plan is critical to the financial security of aging workers. Among workers who do not have access to a workplace retirement plan, only about 13 percent regularly contribute to individual retirement accounts, commonly called IRAs.
6

4

Id.

5

See
U.S. Bureau of Labor Statistics,
Contingent and Alternative Employment Arrangements—May 2017. See also
Copeland,
Employee Benefit Research Institute, Employment-Based Retirement Plan Participation: Geographic Differences and Trends, 2013,
(October 2014); U.S. Government Accountability Office,
Contingent Workforce: Size, Characteristics, Earnings, and Benefits,
April 20, 2015; U.S. Gov't Accountability Office, GAO-15-566, RETIREMENT SECURITY—
Federal Action Could Help State Efforts to Expand Private Sector Coverage
(Sept. 2015) (
www.gao.gov/assets/680/672419.pdf
).

6
The Department calculated this using
Survey of Income and Program Participation 2008 Panel Data Waves 10 and 11.

Regulatory complexity discourages employers—especially small businesses—from offering workplace retirement plans for their employees. Establishing and maintaining a plan is expensive for small businesses. A survey by the Pew Charitable Trusts found that only 53 percent of small-to mid-sized businesses offer a retirement plan; 37 percent of those not offering a plan cited cost as a reason.
7

Employers

often cite annual reporting costs and exposure to potential fiduciary liability as major impediments to plan sponsorship.
8

7
The Pew Charitable Trusts,
Employer Barriers to and Motivations for Offering Retirement Benefits,
(June 2017) (
http://www.pewtrusts.org/-/media/assets/2017/09/employer_barriers_to_and_motivations.pdf
) (“Most commonly, employers without plans said that starting a retirement plan is too expensive to set up (37 percent). Another 22 percent cited a lack of administrative resources. In focus groups, some business representatives said their mix of workers—especially if they included low-wage or short-term employees—translated into limited employee interest in or demand for retirement benefits. But in the survey, only 17 percent cited lack of employee interest as the main reason they did not offer a plan.”).

8

See
U.S. Gov't Accountability Office, GAO-12-326,
Private Pensions Better Agency Coordination Could Help Small Employers Address Challenges to Plan Sponsorship
(March 2012) 18-19,
https://www.gao.gov/products/GAO-12-326.

MEPs thus have the potential to broaden the availability of workplace retirement plans, especially among small employers.
9

MEPs are a structure under which different businesses can adopt a single retirement plan. Pooling resources in this way can be an efficient way not only to reduce costs but also to encourage more plan formation. For example, investment companies often charge lower fund fees for plans with greater asset accumulations. And because MEPs facilitate the pooling of plan participants and assets in one large plan, rather than many small plans, they enable small businesses to give their employees access to the same low-cost funds as large employers offer.

9
Two other types of pension arrangements share features of MEPs, but are not the focus of this proposal. A “multiemployer plan” as defined in ERISA section 3(37) is a plan to which more than one employer is required to contribute and which is maintained pursuant to one or more collective bargaining agreements between one or more employee organizations and more than one employer. There are also Pre-approved Plans, which are plans that are made available by providers for adoption by employers. See Rev. Proc. 2017-41, 2017-29 IRB 92. A plan that uses a Pre-approved Plan document may either be a single-employer plan or a MEP. With respect to single-employer Pre-approved Plans, providers often offer services relating to central administration and may pool the assets of different plans into a central investment fund.

For a small business, in particular, a MEP may present an attractive alternative to taking on the responsibilities of sponsoring or administering its own plan. The MEP structure can reduce the employer's cost of sponsoring a benefit plan and effectively transfer substantial legal risk to professional fiduciaries responsible for the management of the plan. Although employers would retain some fiduciary responsibility for choosing and monitoring the arrangement and forwarding required contributions to the MEP, the employer could keep more of its day-to-day focus on managing its business, rather than on its plan.

Under the proposal here, an employer generally would be required to execute a participation agreement or similar instrument that lays out the rights and obligations of the MEP sponsor and the participating employer before participating. But these employers would not be viewed as sponsoring their own separate, individual plans under ERISA. Rather, the MEP, if meeting the conditions of the proposal below, would constitute a single employee benefit plan for purposes of title I of ERISA. Consequently, the MEP sponsor —and not the participating employers—would generally be responsible, as plan administrator, for compliance with the requirements of title I of ERISA, including reporting, disclosure, and fiduciary obligations. This is so because the individual employers would not each have to act as plan administrators under ERISA section 3(16) or as named fiduciaries under section 402 of ERISA.

Under the Department's proposal, an employer group or association or PEO would be acting as the “employer” sponsoring the plan within the meaning of section 3(5) of ERISA. This means that, typically, the employer group or association or PEO would act as a plan administrator and named fiduciary and, thus, would assume most fiduciary responsibilities. A MEP under this proposal would be subject to all of the ERISA provisions applicable to defined contribution retirement plans, including the fiduciary responsibility and prohibited transaction provisions in title I of ERISA. As a plan that is maintained by more than one employer, the MEP would have to satisfy the requirements of section 210 (a) of ERISA.

B. The Need for Reform

Workers have limited tax-favored options to save for retirement beyond workplace plans. IRAs are not comparable to workplace retirement savings options. As compared to IRAs, the advantages to employees of ERISA-protected retirement plans include: (1) Higher contribution limits; (2) generally lower investment management fees as the size of plan assets increases; (3) a well-established uniform regulatory structure with important consumer protections, including fiduciary obligations, recordkeeping and disclosure requirements, legal accountability provisions, and spousal protections; (4) automatic enrollment; and (5) stronger protections from creditors. At the same time, workplace retirement plans provide employers with choice among plan features and the flexibility to tailor retirement plans that meet their business and employment needs.

Although many MEPs already exist, there are reasons why they are not more widely available. The Department knows from the “association health plan” rulemaking process (AHP Rule), for instance, that many employer groups and associations already exist and have an expressed interest in providing access to employee benefits to their members. We understand that several of these groups and associations view the Department's current interpretive position in subregulatory interpretive rulings, regarding the extent to which these entities may be considered “employers” to sponsor a benefit plan, as overly restrictive. Certain groups and associations may view the current position in subregulatory interpretive rulings as an undue impediment to greater sponsorship of retirement plans, in the same way that certain groups and associations viewed the Department's guidance for health plans prior to the AHP Rule. Likewise, we understand an active PEO industry already exists and that its members, much like employer groups and associations, offer or would like to offer MEPs to their clients. At least some PEOs may be discouraged from doing so by a lack of clear standards, to the detriment of employers, especially small employers.

Federal policy makers across the spectrum are increasingly focusing on the potential for MEPs to help America's workers. The Department is cognizant of Congress's efforts to promote MEPs through legislation.
10

The President, too, has declared it the policy of the Executive Branch to “[e]xpand[ ] access to multiple employer plans . . . [as] an efficient way to reduce administrative costs of retirement plan establishment and maintenance and [to] encourage more plan formation and broader availability of workplace retirement plans, especially among small employers.”
11

10
In both the 114th and 115th Congress, a number of mostly bipartisan legislative proposals have been introduced encouraging the creation of MEPs. In the 115th Congress alone, the following eight bills have been introduced: H.R. 854, the “Retirement Security for American Workers Act,” sponsored by Rep. Vern Buchanan and five bipartisan cosponsors on Feb. 3, 2017, its Senate companion bill, S. 1383, the “Retirement Security Act,” sponsored by Sens. Susan Collins (R-ME) and Bill Nelson (D-FL) on June 6, 2017; .H.R. 4523, the “Automatic Retirement Act of 2017,” sponsored by Rep. Richard Neal (D-MA) on Dec. 8, 2017; H.R. 4637, the “Small Businesses Add Value Act of 2017” (SAVE Act), sponsored by Reps. Ron Kind (D-WI) and Dave Reichert (R-WA) on Dec. 13, 2017; S. 2526/H.R. 5282, the bipartisan bill, the “Retirement Enhancement and Savings Act of 2018” (RESA), sponsored, respectively by Senate Finance Committee Chairman Orrin Hatch (R-UT) and Ranking Member Ron Wyden (D-OR) on March 9, 2018, and Rep. Mike Kelly (R-PA) and 76 cosponsors (as of Sept. 19) on March 14, 2018; S. 3219, The “Small Business Employees Retirement Enhancement Act, ” introduced by Sens. Tom Cotton (R-AR), Todd Young (R-IN), Heidi Heitkamp (D-ND), and Cory Booker (D-NJ) on July 17, 2018; and H.R. 6757, the “Family Savings Act 2018,” introduced on Sept. 10, 2018, by Rep. Rodney Davis (R-IL) and 29 cosponsors . H.R. 6757 was passed by the House of Representatives on Sept. 27, 2018, and referred to the Senate Finance Committee on Sept. 28, 2018, for consideration.

11
Executive Order 13847 (83 FR 45321) (Sept. 6, 2018).

The Department's proposal differs in significant ways from several legislative proposals introduced in Congress. For one thing, the Department's proposal is more limited because it relies solely on the Department's authority to promulgate regulations administering title I of ERISA. Unlike the Department, Congress has authority to make statutory changes to ERISA and other areas of law that govern retirement savings, such as the Internal Revenue Code (Code).

The Department does, however, have authority to interpret the statutes it administers, and it believes that a regulation clarifying the meaning of the statutory term “employer,” 29 U.S.C. 1003(a)(1), will ensure that statutory term is a clear legal standard for the use of MEPs under title I of ERISA. The Department had previously issued subregulatory guidance interpreting this provision that took a narrow view of the circumstances under which a group or association of employers could band together to act “in the interest of” employer members in relation to the offering of retirement savings plans. By clarifying its interpretation of the statutory language, the Department believes it could improve access to employer-sponsored retirement savings plans in America.

The Department recently promulgated a similar rule to expand access to more affordable, quality healthcare by enhancing the ability of employers to band together to provide health benefits through a single ERISA-covered plan, called an “association health plan” (AHP). That regulation, the AHP Rule, issued on June 21, 2018, explains how employers acting together to provide such health benefits may meet the definition of the term “employer” in ERISA section 3(5).
12

The AHP Rule sets forth several criteria under which groups or associations of employers may establish an ERISA-covered multiple employer group health plan. Several commenters on the AHP proposed rule encouraged the Department to bring MEPs within the sweep of that rule or a new rule. In the AHP Rule, the Department said it would consider those comments in the retirement plan context.
13

12
83 FR 28912 (June 21, 2018).

13

Id.
at 28964, n.10 (The “Department will consider comments submitted in connection with this rule as a part of its evaluation of MEP issues in the retirement plan and other welfare benefit plan contexts.”)

On August 31, 2018, President Trump issued Executive Order 13847, “Strengthening Retirement Security in America,” (Executive Order), which states that “[i]t shall be the policy of the Federal Government to expand access to workplace retirement plans for American workers.” The Executive Order directed the Secretary of Labor to examine policies that would: (1) Clarify and expand the circumstances under which U.S. employers, especially small and mid-sized businesses, may sponsor or adopt a MEP as a workplace retirement savings option for their employees, subject to appropriate safeguards; and (2) increase retirement security for part-time workers, sole proprietors, working owners, and other entrepreneurial workers with non-traditional employer-employee relationships by expanding their access to workplace retirement savings plans, including MEPs. The Executive Order further directed, to the extent consistent with applicable law and the policy of the Executive Order, that the Department consider within 180 days of the date of the Executive Order whether to issue a notice of proposed rulemaking, other guidance, or both, that would clarify when a group or association of employers or other appropriate business or organization could be an “employer” within the meaning of ERISA section 3(5).

The Department reviewed current policies regarding MEPs and concluded that it should clarify through regulation that an employer group or association or a PEO that meets certain conditions may sponsor a single MEP under title I of ERISA (as opposed to providing an arrangement that constitutes multiple retirement plans). The Department, therefore, is proposing to issue a regulation interpreting the term “employer” for purposes of ERISA section 3(5). This proposed rule would supersede subregulatory interpretive rulings under ERISA section 3(5), and it would establish more flexible standards and criteria for sponsorship of these MEPs than currently articulated in that prior guidance. This proposed rule is intended to facilitate the adoption and administration of MEPs and to expand access to workplace retirement plans. The Department especially seeks to expand such access for employees of small employers and for certain self-employed individuals. The Department's proposal would not impact existing auto-enrollment options and other features that make 401(k) plans attractive for employers.

As explained more fully in the regulatory impact analysis below, the Department also seeks to level the playing field for small-business employees by permitting them to have access to the lowest-cost funds, often reserved for employees in large-asset plans. Small differences in fund fees can translate into enormous differences in retirement savings over a career.
14

The GAO, for instance, has determined that “participants in smaller plans typically pay higher fees than participants in larger plans.”
15

GAO has emphasized the need for small businesses “to understand plan fees in order to help participants secure adequate retirement savings.”
16

14
Assume an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments over the next 35 years average 7 percent and fees and expenses reduce average returns on the account by 0.5 percent, the account balance will grow to $227,000 at retirement, even if there are no further contributions to the account. If fees and expenses are 1.5 percent, however, the account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce the account balance at retirement by 28 percent.
https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/publications/a-look-at-401k-plan-fees.pdf.

15
GAO-12-325,
Increased Educational Outreach and Broader Oversight May Help Reduce Plan Fees
(April 2012) at 21,
https://www.gao.gov/products/GAO-12-325.

16
GAO Testimony before the Senate Comm. on Health, Education, Labor and Pensions, Statement of Charles A. Jeszeck, GAO Director of Education, Workforce and Income Security, GAO-13-748T (July 16, 2013) at 16,
https://www.gao.gov/assets/660/655889.pdf.

The Department acknowledges that the term “multiple employer plan” is used to refer to different kinds of employee-benefit arrangements. This proposal, however, addresses only two kinds of arrangements: Sponsorship of a MEP plan by either a group or association of employers or by a PEO. The proposed regulation sets forth the circumstances in which a group or association or a PEO is appropriately treated, within the meaning of ERISA section 3(5), as an “employer” in sponsoring an employee benefit plan for participating employers and their employees. The Department's proposal also would not involve defined benefit plans, in part, because the Department's view is that such plans raise different policy considerations. In addition, according to the Government Accountability Office, sponsorship of MEPs “seems to be following the general trend away from traditional benefit plans and towards defined contribution plans.”
17

Therefore, the proposed rule would apply solely to defined contribution plans.

17
GAO-18-111SP,
The Nation's Retirement System: A Comprehensive Re-evaluation Is Needed to Better Promote Future Retirement Security
(Oct. 2017); 2012 GAO report, at 10,
https://www.gao.gov/products/GAO-18-111SP.

The Department solicits public comment on whether the Department should address, by regulation or otherwise, whether there are other types of entities that should be treated as an “employer,” within the meaning of

ERISA section 3(5), for purposes of sponsoring a MEP.
See
Section E, below, entitled “Request for Public Comments.”

The Department also notes that nothing in the proposed rule is intended to suggest that participating in a MEP sponsored either by a bona fide group or association of employers or by a PEO gives rise to joint employer status under any federal or State law, rule, or regulation. The proposal also should not be read to indicate that a business that contracts with individuals as independent contractors becomes the employer of the independent contractor merely by participating in a MEP with those independent contractors, who would participate as working owners, if applicable, or promoting participation in a MEP to those independent contractors, as working owners. The Department asks for comment as to whether concerns about joint employment issues should be addressed further as part of any final rule.

C. Legal Background

1. Statutory Definitions

ERISA section 4 governs the reach of ERISA and, accordingly, of the Department's authority over benefit plans. ERISA applies not to every benefit plan but only to an “employee benefit plan” sponsored “by any employer.” ERISA section 4(a)(1); 29 U.S.C. 1003(a)(1). The provision reads in relevant part: ERISA “shall apply to any employee benefit plan if it is established or maintained by any employer.”
18

ERISA defines “employee pension benefit plan” to include “any plan, fund, or program . . . established or maintained by an employer . . . to the extent that by its express terms or as a result of surrounding circumstances” it provides retirement income to employees or the deferral of such income. The term “employer” is again essential to recognizing an “employee pension benefit plan” within the meaning of ERISA. Thus, a prerequisite of ERISA coverage is that the retirement plan must be established or maintained by an “employer.”

18
ERISA also covers benefit plans established or maintained by employee organizations and such plains operated by both employers and employee organizations.

ERISA section 3(5) defines the term “employer.” ERISA section 3(5); 29 U.S.C. 1002(5). ERISA's definitional provision reads in full:

The term `employer' means 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.

When Congress enacted ERISA in 1974, it copied this important definition from the 1958 Welfare and Pension Plans Disclosure Act. Public Law 85-836, sec. 3(a)(4), 72 Stat. 997, 998 (1958).

But ERISA does not explain what it means for an entity to act “directly as an employer” or “indirectly in the interest of an employer, in relation to an employee benefit plan.” Nor does the statute explain what is meant by a “group or association of employers.” In short, these ambiguous statutory terms are not themselves defined. As one court has recognized, the “problem lies, obviously enough, in determining what is meant by these oblique definitions of employer.”
Meredith
v.
Time Ins. Co.,
980 F.2d 352, 356 (5th Cir. 1993). The statutory lacunae have proven problematic for some courts. They “have found the phrase `act . . . indirectly in the interest of an employer' difficult to interpret.”
Mass. Laborers' Health & Welfare Fund
v.
Starrett Paving Corp.,
845 F.2d 23, 24 (1st Cir. 1988);
accord Greenblatt
v.
Delta Plumbing & Heating Corp.,
68 F.3d 561, 575 (2d Cir. 1995). So too is there statutory ambiguity with the term “group or association of employers.” Because ERISA “does not define th[at] term,” this “void injects ambiguity into the statute.”
MD Physicians & Assocs.
v.
State Bd. of Ind.,
957 F.2d 178, 184 (5th Cir. 1992). Although ERISA contains a definition of “employer,” the important terms used within that definition are unexplained.

In light of all this, and consistent with longstanding principles of administrative law, the Department is best-positioned to address this statutory ambiguity by exercising its discretion to explicate some of the terms used in section 3(5). In doing so, the Department is aided both by the common understanding of the broad terms used in ERISA section 3(5) and by the statutory context.

2. Bona Fide Groups or Associations

The Department has long taken the position that, even in the absence of the involvement of an employee organization, a single “multiple employer plan” under ERISA may exist where a cognizable group or association of employers, acting in the interest of its employer members, establishes a benefit program for the employees of member employers. To satisfy these criteria, the group or association must exercise control over the amendment process, plan termination, and other similar functions of the plan on behalf of the participating-employer members with respect to the plan and any trust established under the program.
19

DOL guidance generally refers to these entities—
i.e.,
entities that qualify as groups or association, within the meaning of section 3(5)—as “bona fide” employer groups or associations.
20

For each employer that adopts for its employees a program of pension or welfare benefits sponsored by an employer group or association that is not “bona fide,” such employer establishes its own separate employee benefit plan covered by ERISA.
21

Largely, but not exclusively, in the context of welfare-benefit plans, the Department has previously distinguished employer groups or associations that can act as an ERISA section 3(5) employer in sponsoring a multiple employer plan from those that cannot. To do so, the Department has asked whether the group or association has a sufficiently close economic or representational nexus to the employers and employees that participate in the welfare plan that is unrelated to the provision of benefits.
22

19

See
83 FR at 28912, 28920.

20

See, e.g.,
Advisory Opinions 2008-07A, 2003-17A, and 2001-04A.

21

See
83 FR 28912, 13 (citing Advisory Opinion 96-25A).

22

See
83 FR 28912;
see also
Advisory Opinions 2012-04A, 1983-21A, 1983-15A, and 1981-44A.

DOL advisory opinions and court decisions have long applied a facts-and-circumstances approach to determine whether there is a sufficient common economic or representational interest or genuine organizational relationship for there to be a bona fide employer group or association capable of sponsoring an ERISA plan on behalf of its employer members. This analysis has focused on three broad sets of issues, in particular: (1) Whether the group or association is a bona fide organization with business/organizational purposes and functions unrelated to the provision of benefits; (2) whether the employers share some commonality and genuine organizational relationship unrelated to the provision of benefits; and (3) whether the employers that participate in a plan, either directly or indirectly, exercise control over the plan, both in form and substance. This approach has ensured that the Department's regulation of employee benefit plans is focused on employment-based arrangements, as contemplated by ERISA's text. This approach also helps distinguish the establishment by a group or association of an employee benefit plan from “commercial insurance,”

consonant with ERISA's structure.
23

The Department continues to believe that this approach provides for a sound reading of ERISA and that it represents a sound policy choice. Concerns for simplicity and uniformity in approach justify applying the same requirement to an entity acting as “a group or association” in the pension context.

23
83 FR 28914, 28917.

3. Professional Employer Organizations

According to the IRS, the term “PEO” generally refers to an organization that “. . . enters into an agreement with a client to perform some or all of the federal employment tax withholding, reporting, and payment functions related to workers performing services for the client.”
24

The provisions of a PEO arrangement typically state that the PEO assumes certain employment responsibilities that the client-employer would otherwise fulfill with respect to employees. Under the terms of a typical PEO contract, the PEO assumes responsibility for paying the employees and for related employment tax compliance, with attending contractual responsibilities and obligations without regard to payment from the client employer to the PEO. A PEO also may manage human resources, employee benefits, workers-compensation claims, and unemployment-insurance claims for the client employer. The client employer typically pays the PEO a fee based on payroll costs plus an additional amount.
25

According to a representative of the PEO industry, “[f]or the obligations a PEO agrees to take on with respect to its clients, the PEO assumes specific employer rights, responsibilities, and risks through the establishment and maintenance of a relationship with the workers of the client[,]” including in some cases to “reserve a right of direction and control of the employees with respect to particular matters.”
26

Within the array of PEO-provided services and functions, nearly all PEOs offer some type of retirement plan to their client employers.
27

24
Certified Professional Employer Organizations, 81 FR 27315-01 (May 6, 2016).

25
Foster, Michael D.,
Certified Professional Employer Organizations
(July 7, 2016)
https://www.jacksonkelly.com/tax-monitor-blog/certified-professional-employer-organizations.

26
National Association of Professional Employer Organizations (
https://www.napeo.org/what-is-a-peo/about-the-peo-industry/what-is-co-employment
).

27

See, e.g.,
Bassi, Laurie,
Professional Employer Organizations: Fueling Small business Growth,
(Sept. 2013), at 2-3 (
https://www.napeo.org/docs/default-source/white-papers/whitepaper1.pdf?sfvrsn=2
).

(a) Current Primary Legal Authority

Although many PEOs administer plans for their client employers today, there is little direct authority on precisely what it means for a PEO or other entity to act “indirectly in the interest” of its client employers in relation to an employee benefit plan for purposes of ERISA section 3(5). But whether a PEO is an “employer” under section 3(5) depends on the “indirectly in the interest of an employer” provision, not the “employer group or association” provision. And neither existing subregulatory guidance nor judicial authority has articulated a specific test to determine when a PEO is sufficiently tied to its client-employer to be said to be acting “indirectly in the interest of an employer, in relation to an employee benefit plan,” within the meaning of section 3(5).
28

The different statutory text and differences in the nature of the employer relationships merit a different regulatory approach to PEOs than to employer groups or associations.

28
The lack of a specific and clear test leads to different outcomes.
Compare Yearous
v.
Pacificare of California,
554 F. Supp. 2d 1132 (S.D. Cal. 2007) (applying factors in
Nationwide Mut. Ins. Co.
v.
Darden,
503 U.S. 318 (1992), court concluded that PEO is direct employer of owner of company for purposes of sponsoring an ERISA covered healthcare plan covering the owner and his beneficiaries)
with Texas
v.
Alliance Employee Leasing Co.,
797 F. Supp. 542 (N.D. Tex. 1992) (finding leasing company did not act directly or indirectly as employer under ERISA).

The IRS, for example, has already recognized that a PEO may offer a MEP for its clients under the Code. The Code sets forth rules for a plan maintained by more than one employer. Specifically, Code section 413(c) addresses the tax-qualified status of certain pension “plans” that cover the employees of multiple employers.
29

Under § 1.413-2(a)(2), a plan is subject to the requirements of section 413(c) if it is a single plan within the meaning of § 1.413-1(a)(2)
30

and the plan is maintained by more than one employer.

29
Several of the rules applicable to plans under section 413(c) of the Code are parallel to the rules for plans maintained by more than one employer under section 210 of ERISA. Under section 101 of Reorganization Plan No. 4 of 1978 (43 FR 47713), the Secretary of the Treasury has interpretive jurisdiction over ERISA section 210.

30
Section 1.413-1(a)(2) applies the definition of a single plan in § 1.414(l)-1(b), providing that a plan is a single plan if and only if, on an ongoing basis, all of the plan assets are available to pay benefits to employees who are covered by the plan and their beneficiaries.

Pursuant to section 413(c) and the regulations thereunder, for purposes of certain qualification requirements, all employees of each of the employers maintaining a MEP (participating employers) are treated as being employed by a single employer.
31

31
For example, under section 413(c)(1) of the Code and § 1.413-2(b) of the Income Tax Regulations, Code section 410(a) (participation) and the regulations thereunder are applied as if all employees of each of the employers who maintain the plan are employed by a single employer. In addition, under section 413(c)(2) of the Code and § 1.413-2(c) of the Income Tax Regulations, in determining whether a MEP is, with respect to each participating employer, for the exclusive benefit of its employees (and their beneficiaries), all of the employees participating in the plan are treated as employees of each such employer. See IRS Rev. Proc. 2002-21 (providing “a framework under which plans sponsored by PEOs will not be treated as violating the exclusive benefit rule solely because they provide benefits to Worksite Employees.”). Finally, under section 413(c)(3) of the Code and § 1.413-2(d) of the Income Tax regulations, Code section 411 (minimum vesting standards) and the regulations thereunder are generally applied as if all employers who maintain the plan constituted a single employer.

Under section 413 of the Code, other qualification rules are applied separately to each participating employer. For example, under § 1.413-2(a)(3)(ii) of the Income Tax Regulations, the minimum coverage requirements of Code section 410(b) and related nondiscrimination requirements are generally applied to a MEP on an employer-by-employer basis.

(b) Current Secondary Legal Authority

Some federal statutes treat a PEO as an “employer” for limited purposes in other circumstances. For instance, regulations issued pursuant to the Family and Medical Leave Act of 1993 (FMLA) specifically recognize that a PEO may, under certain circumstances, enter into a relationship with the employees of its client companies such that it is considered a “joint employer” for purposes of determining FMLA coverage and eligibility, enforcing the FMLA's anti-retaliation provisions, and in limited situations, providing job restoration.
32

In the main, however, the FMLA regulations clarify that a “PEO does not enter into a joint employment relationship with the employees of its client companies when it merely performs . . . administrative functions,” such as “payroll benefits, regulatory paperwork, and updating employment policies.” 29 CFR 825.106(b)(2). The regulation makes clear that PEOs do not become joint employers simply by virtue of providing such services to client-employers.

32
29 CFR 825.106(b)(2), (e).

In addition, Code section 3401(d) defines the term “employer,” for purposes of income tax withholding, this way: “the person for whom an individual performs or performed any service . . . as the employee of such person except that if the person for

whom the individual performs or performed the services does not have control of the payment of the wages for such services, [then] the term `employer' . . . means the person having control of the payment of such wages.”
33

33
In
Otte
v.
United States,
419 U.S. 43 (1974), the Supreme Court held that a person who is an employer under section 3401(d)(1), relating to income tax withholding, is also an employer for purposes of withholding the employee share of Federal Insurance Contributions Act (FICA) under section 3102. The
Otte
decision has been extended to provide that the person having control of the payment of the wages is also an employer for purposes of section 3111, which imposes the FICA tax on employers, and section 3301 (Federal Unemployment Tax Act (FUTA) tax). See
In re Armadillo Corp.,
410 F. Supp. 407 (D. Colo. 1976), affd, 561 F.2d 1382 (10th Cir. 1977);
In re The Laub Baking Co.,
642 F.2d 196, 199 (6th Cir.1981).

An entity meeting these requirements is referred to as the “statutory employer.” Although generally PEOs do not have exclusive control of the payment of wages within the meaning of the applicable regulations requiring “legal control”, in some cases, a PEO has been found to be the employer under Code § 3401(d)(1) under the facts of the case.
34

34

United States
v.
Total Employment Co. Inc., 305 B.R. 333 (M.D. Fla. 2004).

Furthermore, the Tax Increase Prevention Act of 2014, Public Law 113-295 (Dec. 19, 2014) required the IRS to establish a voluntary certification program for such PEOs (CPEO Program) as discussed in more detail below.

The CPEO Program recognizes PEOs that meet certain requirements within the Code and provides a level of assurance to small-business owners that rely on a CPEO to handle their employment-tax issues. CPEOs are treated as employers under the Code for employment tax purposes with regard to remuneration paid to their customers' employees under CPEO service contracts. A CPEO is solely liable for the employment tax withholding, payment, and reporting obligations with respect to remuneration it pays to work site employees (as defined in IRC 7705(e)).”
35

35
See IRC section 3511(a)(1).

D. Overview of Proposed Regulation

1. General

The Department believes that providing additional opportunities for employers to join MEPs as a way to offer workplace retirement savings plans to their employees could, under the conditions proposed here, offer many small businesses more affordable and less burdensome retirement savings plan alternatives than are currently available. The Department expects that the proposal, if finalized, would prompt some small businesses that do not currently offer workplace retirement benefits to offer such benefits. The proposal could increase the number of employees enrolled in workplace retirement plans, thereby offering America's workers better retirement savings opportunities and greater retirement security.

Paragraph (a) of the proposal defines the scope of the rulemaking. This paragraph provides that bona fide employer groups or associations and bona fide PEOs may act as an “employer” under ERISA section 3(5) for purposes of sponsoring a MEP. In each case, this interpretation is based upon the Department's conclusion that such bona fide employer groups, associations, or PEOs act “in the interest of” their employer members in relation to a retirement savings plan. Paragraph (a) would limit this rulemaking to defined contribution plans, as defined in ERISA section 3(34); the proposal thus does not cover welfare plans or other types of pension plans. The proposal is limited in this manner because the Department believes that consideration and development of any proposal covering other types of pension and welfare plans or other persons or organizations as plan sponsors would benefit from public comments and additional consideration by the Department.

2. Bona Fide Employer Groups or Associations

Paragraph (b) of the proposal would define and clarify the criteria for a “bona fide” group or association of employers capable of establishing a MEP.
36

This paragraph would replace and supersede criteria in prior subregulatory guidance. The proposed criteria are intended to distinguish bona fide group or association MEPs from products and services offered by purely commercial pension administrators, managers, and record keepers. These commercial enterprises are outside the scope of the rule as proposed.
37

36
The term “bona fide” in the proposal refers to a group, association, or PEO that meets the conditions of the proposed regulation and, therefore, is able to be an “employer” for purposes of section 3(5) of ERISA. No inferences should be drawn from the use of this term regarding the actual bona fides of the group, association or organization outside of this context.

37

See
Section E, Request for Public Comments.

Specifically, paragraph (b)(1) of the proposal contains seven criteria for determining whether a group or association of employers is a “bona fide” group or association of employers for purposes of ERISA section 3(5) and the regulation. With one exception, these criteria parallel those used in the AHP Rule and are intended to have the same meaning and effect here, as they have there. Four of the criteria provide that the group or association must have a formal organizational structure, be controlled by its employer members, have at least one substantial business purpose unrelated to offering and providing employee benefits to its employer members, and limit plan participation to employees and former employees of employer members.
38

Two other criteria provide that employer members must have a commonality of interest and that each employer must act directly as an employer of at least one employee participating in the MEP. The intent of including these criteria in paragraph (b) is to distinguish between groups and associations that act as employers within the meaning of ERISA section 3(5), from other entities that do not act as an “employer.” As explained in the AHP Rule, ERISA section 3(5) of ERISA and ERISA Title I's overall structure contemplate employment-based benefit arrangements.
39

Moreover, the Department's authority to define “employer” and “group or association of employers” under ERISA section 3(5) does not broadly extend to arrangements established to provide benefits outside the employment context and without regard to the members' status as employers.
40

38
A bona fide group or association may sponsor both an AHP and a MEP, but the group or association would have to have at least one substantial business purpose other than offering employee benefit plans.

39
83 FR 28912, 28913 (June 21, 2018).

40

Id.
at 28916.

The AHP Rule, in relevant part, prohibits health-insurance companies from being treated as a bona fide group or association. A construction of “employer” encompassing insurance companies that are merely selling commercial insurance products and services to employers would effectively read the definition's employment-based limitation out of the statute. In a broad colloquial sense, it is possible to say that commercial service providers, such as banks, trust companies, insurance companies, and brokers, act “indirectly in the interest of” their customers, but that does not convert every service provider into an ERISA-covered “employer” of their customer's employees. Accordingly, the Department required that the individual employer members of the group or association must control the AHP, and the Department declined to construe “employer” in a manner that would permit commercial insurers to market insurance products and services as AHP sponsors.

The Department believes that applying a similar understanding of “group or association” of employers in the pension context as in the AHP context promotes simplicity and uniformity in regulatory structure. The Department therefore applies a similar approach to employer groups or associations sponsoring MEPs. Accordingly, paragraph (b)(vii) of the proposal would prohibit an employer group or association from being a bank, trust company, insurance issuer, broker-dealer, or other similar financial-services firm (including pension record keepers and third-party administrators) and from being owned or controlled by such a financial-services firm.

The proposed rule does not contain provisions analogous to the healthcare nondiscrimination provisions of the AHP Rule because defined contribution retirement plans do not underwrite health risk and are not susceptible to the rating and segmentation pressures that characterize the healthcare marketplaces. Some defined contribution plans may offer lifetime income features, such as immediate or deferred annuities, which potentially implicate some degree of longevity risk. The Department, however, does not believe the presence of longevity risk in ancillary features of defined contribution MEPs warrants nondiscrimination provisions analogous to those of the AHP Rule. The Department also believes that any relevant nondiscrimination concerns are already addressed in the tax-qualification provisions of the Code or other federal laws. The Department solicits comments on this issue.

Paragraph (b)(2) of the proposal sets forth standards for determining whether employers have sufficient commonality of interests for purposes of the commonality requirement in paragraph (b)(1). Specifically, this paragraph would allow employers to band together for the express purpose of offering MEP coverage if the employers are in the same trade, industry, line of business, or profession; or if the employers have a principal place of business within a region that does not exceed the boundaries of the same state or the same metropolitan area (even if the metropolitan area includes more than one state). Determinations of what is a “trade,” “industry,” “line of business,” or “profession,” as well as whether an employer fits into one or more of these categories, are based on all relevant facts and circumstances; the Department intends for these terms to be construed broadly to expand employer and employee access to MEP coverage.

3. Professional Employer Organizations

Paragraph (c) of the proposal would establish four criteria that must be met for a PEO to qualify as a “bona fide” PEO that may act “indirectly in the interest of [its client] employers” and, consequently, as an “employer” under ERISA section 3(5) for purposes of sponsoring a MEP covering the employees of client employers. Specifically, paragraph (c)(1)(i) of the proposal would require the PEO to perform substantial employment functions on behalf of the client employers. Paragraph (c)(1)(ii) would require the PEO to have substantial control over the functions and activities of the MEP, and assume certain statutory roles under ERISA. As further explained below, looking to substantial control is sensible given the language of section 3(5) of ERISA. Paragraph (c)(1)(iii) would require the PEO to ensure that each client-employer participating in the MEP has at least one employee who is a participant covered under the MEP. Paragraph (c)(1)(iv) of the proposal would provide that the PEO must ensure that participation in the MEP is limited to current and former employees of the PEO and of client-employers, as well as their beneficiaries.

A PEO's assumption and performance of substantial employment functions on behalf of its client-employers is one of the lynchpins of the proposal. Just as commonality and control establish the nexus for groups or associations of employers under paragraph (b) of the proposal, the PEO's assumption and performance of employment functions for its client employers contributes significantly to the establishment of the requisite nexus for PEOs. Requiring the PEO to stand in the shoes of the participating client employers—by assuming and performing substantial employment functions that the client-employers otherwise would fulfill with respect to their employees—is what distinguishes bona fide PEOs under the proposal from service providers or other entrepreneurial ventures that in substance merely market or offer client-employers access to retirement plan services and products. This requirement applies a clear limiting principle to entities that can be said to be acting “indirectly in the interest of” another employer within the meaning of ERISA section 3(5).

A PEO's status under this proposal and whether a PEO performs substantial employment functions as described herein, however, is not tantamount to the PEO's assumption or creation of an employment relationship (whether referred to as joint employment or otherwise) with the client-employer, for purposes of other laws or liabilities. The question of joint employment for purposes of other laws and liabilities is an independent inquiry wholly unaffected by a PEO's potential status as an “employer” within the meaning of ERISA section 3(5). Whether a PEO qualifies as an ERISA section 3(5) “employer” under the “indirectly” provision has no effect on the rights or responsibilities of any party under any other law, including the Code, and neither supports nor prohibits a finding of an employment relationship.

A second important limiting principle in construing section 3(5)'s “indirectly in the interest of” clause is that the PEO must have substantial control of the functions and activities of the employee benefit plan at issue. This construction comports with the definition's reference to a person acting as the employer “in relation to the plan.” Consequently, paragraph (c)(1)(ii) of the proposal would require the PEO to have substantial control over the functions and activities of the MEP, as the plan sponsor (within the meaning of section 3(16)(B) of the Act), the plan administrator (within the meaning of section 3(16)(A) of the Act), and a named fiduciary (within the meaning of section 402 of the Act).

To provide guidance on what is meant by performing “substantial employment functions” under the proposal, paragraph (c)(2)(ii) of the proposed rule provides a disjunctive list of nine relevant criteria, even one of which may be sufficient to establish substantiality depending on the particular facts and circumstances and the particular criterion. This list was drawn from the types of services and functions PEOs routinely offer their clients, and with reference to the CPEO statutory and regulatory provisions.

The list of “substantial employment functions” in paragraph (c)(2)(ii) of the proposal would look to whether, with respect to client-employer employees participating in the PEO's plan, the organization is responsible for:

• Payment of wages to the employees without regard to the receipt or adequacy of payment from its client employers;

• Reporting, withholding, and paying any applicable federal employment taxes, without regard to the receipt or adequacy of payment from its client employers;

• Recruiting, hiring, and firing workers in addition to the client-employer's responsibility for recruiting, hiring, and firing workers;

• Establishing employment policies, conditions of employment, and

supervising employees in addition to the client-employer's responsibility to perform these same functions;

• Determining employee compensation, including method and amount, in addition to the client-employer's responsibility to determine employee compensation;

• Providing workers' compensation coverage in satisfaction of applicable State law, without regard to the receipt or adequacy of payment from its client employers;

• Integral human-resource functions, such as job description development, background screening, drug testing, employee-handbook preparation, performance review, paid time-off tracking, employee grievances, or exit interviews, in addition to the client employer's responsibility to perform these same functions;

• Regulatory compliance in the areas of workplace discrimination, family and medical leave, citizenship or immigration status, workplace safety and health, or permanent labor-certification program, in addition to the client employer's responsibility for regulatory compliance; or

• The organization continues to have employee benefit plan obligations to MEP participants after the client employer no longer contracts with the organization.

The proposal provides that, depending on the facts and circumstances of the particular situation, even one of these criteria alone may be sufficient to satisfy the requirement that a PEO perform substantial employment functions on behalf of its client employers. Just as a way of illustrating the Department's intent with respect to the provision, with respect to the PEO's responsibility to supervise employees of client employers (as contemplated under the criterion in paragraph (c)(2)(ii)(D) of the proposal), the Department would likely consider a PEO to meet the substantiality requirement if, for example, the PEO controlled the manner and means by which employees accomplished their assigned chores or completed their assignments, without regard to the extent or degree to which the PEO satisfied the other eight criteria. On the other hand, the Department likely would not reach the same conclusion if the only function performed by the PEO, for example, is that it performs drug testing on behalf of its client-employers, even if the PEO assumes complete responsibility for that task.

Although this approach offers PEOs the flexibility of a facts-and-circumstances approach, the Department also understands that some entities may prefer more regulatory certainty in ordering their business affairs. For this reason, the proposal contains two regulatory safe harbors separate from the facts-and-circumstances test described above.

The first safe harbor provides that a PEO will be considered to perform substantial employment functions on behalf of its client-employers if it is a “certified professional employer organization” (CPEO) within the meaning of Code section 7705 and regulations thereunder, has a “service contract” within the meaning of Code section 7705(e)(2) with the client employers who adopt the MEP with respect to the client-employer employees participating in the MEP, satisfies the criteria in paragraphs (c)(2)(ii)(A)-(C) of the proposal, and also meets at least two criteria listed in paragraph (c)(2)(ii)(D) through (I) of the proposal. Generally a CPEO is a PEO that has applied for certification and has been certified by the Internal Revenue Service (IRS) as meeting the requirements of Code section 7705(b). To become and remain a CPEO, a PEO must demonstrate (and continue to demonstrate) to the IRS that it meets specified requirements relating to tax status, background, experience, business location, and annual financial audits. Among other requirements, to become and remain a CPEO, the PEO must also agree to satisfy certain bond, financial review, and reporting requirements.
41

The IRS has the authority to suspend and revoke the certification of any CPEO if it determines that the CPEO is not satisfying the requirements of Code sections 7705(b) or (c) or fails to satisfy applicable accounting, reporting, payment, or deposit requirements. These attributes are also relevant to employers' consideration of PEOs when evaluating retirement options because they may reduce the potential for fraud, abuse, and mismanagement with respect to employment functions.

41
IRC section 7705(b) and (c); 26 CFR 301.7705-2T—CPEO Certification Requirements.

The second safe harbor is for PEOs that do not satisfy the CPEO safe harbor but meet five or more criteria from the list in paragraph (c)(2)(ii) of the proposal. The Department understands that the CPEO Program is voluntary; therefore, not all PEOs are (or remain) CPEOs. The Department does not believe that the absence of CPEO status necessarily should disqualify a PEO from acting as an employer in sponsoring a MEP. This safe harbor thus applies when covered PEOs meet at least half of the relevant criteria, with the choice as to the five particular criteria left to the discretion of the PEO based on its business structure and operations. Although any single criterion alone may, depending on the facts and circumstances and particular criterion, be sufficient to satisfy the requirement that a PEO perform substantial employment functions on behalf of its client employers, as a safe harbor, the Department is of the view that meeting at least half of the listed criteria demonstrates convincingly that the PEO is performing substantial employment functions and ensures that PEOs using this safe harbor provision will fall well within the definition in section 3(5). The same standard of five criteria also effectively applies to the CPEO safe harbor in paragraph (c)(2)(i) of the proposal because CPEOs entering into CPEO service-contracts within the meaning of section 7705(e)(2) with client-employers who adopt the MEP must both assume and perform employment functions on behalf of client-employers under the relevant criteria set forth in paragraph (c)(2)(ii)(A)-(C) of the proposed regulation with respect to the client-employer employees participating in the MEP, and would still need to satisfy two more criteria to fall within the CPEO safe harbor.

4. Dual Treatment of Working Owners as Employers and Employees

Like the AHP Rule,
42

paragraph (d) of this proposed rule would expressly provide that working owners, such as sole proprietors and other self-employed individuals, may elect to act as employers for purposes of participating in a bona fide employer group or association as described in (b)(1) of the proposed regulation and also be treated as employees of their businesses for purposes of being able to participate in the MEP.

42
83 FR at 28964.

To qualify as a working owner, a person would be required to work at least 20 hours per week or 80 hours per month, on average, or have wages or self-employment income above a certain level. Specifically, the working owner's wages or self-employment income must equal or exceed the working owner's cost of coverage to participate in the group or association's health plan, if the group or association has such a plan. In other words, if the working owner makes enough money to be considered both an employer and employee under the AHP Rule, the working owner may also be considered both an employer

and employee under this proposal.
43

The Department adopts this threshold because, unlike healthcare coverage, participation in a MEP does not have a specific dollar amount associated with the benefits; thus, there is no minimum cost of participation.
44

43
The earned income standard in the proposal is informed by Federal tax standards, including section 162(l) of the Code, that describe conditions for self-employed individuals to deduct the cost of health insurance. Thus, for purposes of the working owner provisions of paragraph (d) of the proposal, the definitions of “wages” and “self-employment income” in Code sections 3121(a) and 1402(b) (but without regard to the exclusion in section 1402(b)(2)), respectively, would apply.

44
Under section 401(c) of the Code, a self-employed individual must have earned income in order to participate in a qualified retirement plan. The Department's provisional view is that it seems unlikely that a “working owner” as defined in paragraph (d)(2) of the proposal who is not a common law employee would fail to meet the requirements of section 401(c) of the Code. The Department invites comments on whether this view is correct, and if not correct, whether a final rule should include changes to the working-owner definition for MEPs designed to be qualified under section 401(a) of the Code. For example, a final rule could further limit the definition of working owners to self-employed individuals described in 401(c) of the Code. One way to accomplish this limitation could be to add a condition to paragraph (d)(2) of the proposal to ensure that the working owner “is an employee within the meaning of section 401(c)(1) of the Code, and the employer of such individual is the person treated as his employer under section 401(c)(4) of the Code.” Alternatively, consistent with E.O. 13847 and the Code, the Department invites comments on whether, if the Department's provisional view is not correct, the Secretary of the Treasury should consider action pursuant to Section 2(b) of E.O. 13847, which directs the Secretary of the Treasury to consider proposing amendments to regulations or other guidance regarding the circumstances under which a MEP must satisfy the tax qualification requirements in the Code. Because the Secretary of the Treasury has interpretive jurisdiction over section 401 of the Code, any comments relating to this topic will be shared with the Department of the Treasury.

The proposed rule would not extend this definition to MEPs sponsored by PEOs under paragraph (c) of the proposal. Thus, a working owner's trade or business would have to have at least one common law employee to participate in a PEO's MEP under paragraph (c) of the proposed regulation. The Department understands that working owners without employees generally would not have need for the employment services of PEOs, such as payroll, compliance with federal and state workplace laws, and human-resources support. Thus, a trade or business without employees would not seem to have a genuine need for a relationship with a PEO. Accordingly, the working-owner provision would only apply for purposes of participation in MEPs sponsored by a bona fide group or association. The Department understands, however, that there may be circumstances in which a working owner without common law employees has a genuine need to be in a PEO's MEP. For example, if the working owner has had common law employees and used a PEO, including joining the PEO's MEP, but was later unable to afford to continue to employ others and did not want to stop participating in the PEO plan. Accordingly, the Department solicits comments on the circumstances, if any, under which working owners without employees should be able to participate in a multiple employer plan through a PEO under title I of ERISA.

E. Request for Public Comments

The proposed regulation addresses when a group or association of employers or PEO falls within the definition of “employer” under ERISA section 3(5) for purposes of sponsoring a MEP under title I of ERISA to cover the employees of member employers. The Department invites comments on all aspects of this proposal, including its scope, as well any data, studies or other information that would help refine and improve the proposal's estimated costs, benefits, and transfers.

The Executive Order called on the Department to consider more generally whether businesses or organizations other than groups or associations of employers and PEOs should be able to sponsor a single MEP under title I of ERISA by acting indirectly in the interest of participating employers in relation to the plan within the meaning of ERISA section 3(5). The Department is aware of at least two other types or categories of MEPs not specifically addressed in the proposed rule.
45

While both of these categories are outside the scope of the rule as proposed, the Department specifically solicits public comments on whether the Department should address one or more of these other categories of MEPs, by regulation or otherwise.

45
A 2012 GAO report separated MEPs into four categories. U.S. Government Accountability Office, GAO, “12-665, “Private Sector Pensions—Federal Agencies Should Collect Data and Coordinate Oversight of Multiple Employer Plans,” (Sept. 2012) (
https://www.gao.gov/products/GAO-12-665
).

The first category includes so-called “corporate MEPs,” which are plans that cover employees of related employers which are not in the same controlled group or affiliated service group, within the meaning of section 414(b), (c), and (m) of the Code. While corporate MEPs are not directly addressed in this guidance, the Department does not intend to convey that a corporate MEP could not be a single employee benefit plan under title I of ERISA. Rather, comments specifically are requested on whether any regulatory provisions or other guidance is needed to address the MEP status of plans maintained by such related employers.

The second category consists of “open MEPs,” which are plans that cover employees of employers with no relationship other than their joint participation in the MEP. As mentioned earlier in this preamble, many recent legislative proposals center on these later arrangements, which are often referred to as “pooled employer plans.” Comments specifically are requested on whether, and under what circumstances, so-called “open MEPs” or “pooled employer plans,” as depicted in the various legislative proposals, could be operated as an employment-based arrangement, as contemplated by ERISA's text. To the extent commenters believe that these arrangements should be addressed in this or a future rulemaking, the Department asks that the comments include a discussion of why such an arrangement should be treated as one employee benefit plan within the meaning of title I of ERISA rather than as a collection of separate employer plans being serviced by a commercial enterprise that provides retirement plan products and services. Such commenters also should provide suggestions regarding the regulatory conditions that should apply to the particular arrangement.

The Department solicits comments on whether including working owners in the current proposal could affect the utility of 401(k) plans for working owners, who may prefer those plans because of their ERISA-exempt status (or other reasons). Under current law, working owners without employees can sponsor 401(k) plans, often called solo-401(k) plans. Under the Code, these plans, like other 401(k) plans, are subject to rules concerning eligibility, contributions, taxes, and distributions. Solo 401(k) plans, however, have historically been outside the coverage of title 1 of ERISA. 29 CFR 2510.3-3. The Department's proposal would permit working owners to participate in ERISA-covered MEPs without altering its position that a “plan under which . . . only a sole proprietor” participates “will not be covered under title I.” 29 CFR 2510.3-3(b). The Department seeks comments on whether additional or different regulatory amendments should be made to confirm or clarify the long-established exclusion from ERISA of solo 401(k) plans, given the proposal to permit working owners to participate in ERISA-covered ARPs.

Comments are also invited on the interaction of the proposal with and consequences under other state and federal laws, including the interaction

with Code section 413(c), which would apply to all tax-qualified MEPs including those described in paragraph (b) and (c) of the proposal.
46

The Department's provisional view is that it seems unlikely that a MEP that is sponsored and maintained by an employer group or association or PEO, and that is subject to the rules of section 413(c) of the Code, would fail to qualify under the Department's proposed criteria. The Department invites comments on whether this view is correct and, if not correct, on the extent to which grandfathering rules or transitional assistance or guidance might be advisable.

46
Under section 101 of Reorganization Plan No. 4 of 1978 (43 FR 47713), the Secretary of the Treasury has interpretive jurisdiction over section 413 of the Code and ERISA section 210. Accordingly, any comments relating to section 413(c) of the Code will be shared with the Department of the Treasury.

The Department also invites comments on whether any notice or reporting requirements are needed to ensure that participating employers, participants, and beneficiaries of MEPs, are adequately informed of their rights or responsibilities with respect to MEP coverage and that the public has adequate information regarding the existence and operations of MEPs. Comments are also solicited for data, studies or other information that would help estimate the benefits, costs, and transfers.

As indicated, a MEP would be a single ERISA plan under title I of ERISA if it complies with the requirements in the proposed rule. As such, ERISA would apply to the MEP in the same way that ERISA applies to any employee benefit plan, but the MEP sponsor, typically acting as the plan's administrator and named fiduciary, would administer the MEP.
47

This person will have considerable discretion in determining, as a matter of plan design or a matter of plan administration, how to treat the different interests of the multiple participating employers and their employees. Accordingly, this person, in distributing, investing, and managing the MEP's assets, must be neutral and fair, dealing impartially with the participating employers and their employees, taking into account any differing interests.
48

For example, when the fiduciary of a large MEP uses its size to negotiate and secure discounted prices on investments and other services from plan services providers, as is generally required by ERISA, the fiduciary is bargaining on behalf of all participants regardless of the size of their employer, and should take care to see that these advantages are allocated among participants in an evenhanded manner. Treating participating employers and their employees differently without a reasonable and equitable basis would raise serious concerns for the Department. Comments are invited on whether there is a need for guidance or clarification on the application of this principle to the various aspects of MEP administration, including investment management, recordkeeping, and allocating plan costs and expenses among the participants and beneficiaries of participating employers.

47
As noted elsewhere, in the case of a PEO MEP under paragraph (c) of the proposal, the PEO, as the plan sponsor, must always act as the plan's administrator (within the meaning of section 3(16)(A)) and a named fiduciary (within the meaning of section 402 of ERISA) of the MEP.

48

See
Field Assistance Bulletin No. 2003-03 (addressing what rules apply to how expenses are allocated among plan participants in a defined contribution pension plan).
See also Varity Corp.
v.
Howe,
516 U.S. 489, 514 (1996) (“The common law of trusts recognizes the need to preserve assets to satisfy future, as well as present, claims and requires a trustee to take impartial account of the interests of all beneficiaries.”);
Restatement (Second) of Trusts
section 183 (“If a trust has two or more beneficiaries, the trustee, in distributing, investing, and managing the trust property, shall deal impartially with them, taking into account any differing interests.”)

F. Regulatory Impact Analysis

1. Summary

As discussed earlier in this preamble, this proposed rule is intended to facilitate the creation and maintenance of MEPs by clarifying the circumstances under which a person may act as an “employer” within the meaning of ERISA section 3(5) in sponsoring a MEP. Workplace retirement plans provide an effective way for employees to save for retirement. Many hardworking Americans, however, do not have access to a retirement plan at work, especially those employed by small employers or acting as “working owners” without employees (referred to herein as the “self-employed”). This has become a more significant issue as employees are living longer and facing the difficult prospect of outliving their retirement savings. Expanding access to private sector MEPs could encourage the formation of workplace retirement plans and broaden the access to such plans among small employers and the self-employed.

Many employer groups and associations have a thorough knowledge of the economic challenges their members face. Using this knowledge and the regulatory flexibility provided by this proposed rule, employer groups and associations could sponsor MEPs tailored to the retirement plan needs of their members at lower costs than currently available options. Thus, this proposed rule, if finalized, could provide employers with an important option to increase access of workers, particularly those employed at small businesses and the self-employed, to high-quality workplace retirement plans.

Small employers could benefit from economies of scale by participating in MEPs, which could reduce their administrative burdens, fiduciary liability exposure, and plan fees. Like other large retirement plans, large MEPs created by sponsors meeting the conditions set forth in the proposal would enjoy scale discounts and might exercise bargaining power with financial services companies. Large MEPs would pass some of these savings through to participating small employers. In particular, investment funds with tiered pricing have decreasing expense ratios based on the aggregate amount of money invested by a single plan.
49

As a single plan, MEPs should lower the expense ratio for investment management through the pooling of investments from member employers because the fee thresholds would apply at the MEP level rather than at the member employer level.
50

49
According to Morningstar, nearly half of all investment funds have management fee breakpoints at which fees are automatically reduced upon reaching an investment threshold.
See
Michael Rawson and Ben Johnson, “2015 Fee Study: Investors Are Driving Expense Ratios Down,” Morningstar, 2015, available at
https://news.morningstar.com/pdfs/2015_fee_study.pdf.

50
MEPs create a pool of assets for investment that, at the investment management level, are no different from pools of assets from other employee benefit plans. Consistent with the Department's view that the pool of assets is a single plan, the Department expects that breakpoints for expense ratios would be applied at the MEP level rather than at the member employer level. The Department solicits comments on this matter.

Many well-established, geographically based organizations, such as local chambers of commerce, are strong candidates to sponsor MEPs. Currently, these geographically based organizations are restricted from doing so as a sponsor of a single plan under title I of ERISA, however, unless their MEP meets the requirements of the Department's 2012 subregulatory guidance for determining whether groups or associations of employers, or PEOs were able to act as employers under section 3(5) of ERISA. Such previous guidance requires groups or associations to have a particularly close economic or representational nexus to employers and employees participating in the plan. Many groups or associations and PEOs have identified these criteria, along with the absence of a clear

pathway for PEOs to sponsor MEPs, as major impediments to the expansion of MEPs that are treated as single plans. By providing greater flexibility governing the sponsorship of MEPs, the Department expects that this proposed rule would reduce costs and increase access to workplace retirement plans for many employees of small businesses and the self-employed.

Other benefits of the expansion of MEPs include: (1) Increased economic efficiency as small firms can more easily compete with larger firms in recruiting and retaining workers; (2) increased tax equity as workers who previously did not have access to a qualified workplace retirement plan begin to benefit from tax savings when their employers provide access to a retirement plan through a MEP; (3) enhanced portability for employees that leave employment with an employer to work for another employer participating in the same MEP; and (4) higher quality data (more accurate and complete) reported on the Form 5500.

The Department is aware that MEPs could be the target of fraud or abuse. By their nature, MEPs have the potential to build up a substantial amount of assets quickly and the effect of any abusive schemes on future retirement distributions may be hidden or difficult to detect for a long period. The Department, however, is not aware of direct information indicating that the risk for fraud and abuse is greater for MEPs than for single employer defined contribution pension plans. Furthermore, the Department has compliance assistance and enforcement systems in place to safeguard plan assets.

The Department believes that participation in workplace retirement plans would increase because of this proposal; however, there is some uncertainty regarding the extent. Participation levels in workplace retirement plans depend on both how many employers decide to offer plans and how many employees choose to participate in those plans. An employer's decision to offer a retirement plan relies on many factors, only some of which this proposed rule would affect. If more employers adopt MEPs, it is unclear how many of their employees would choose to enroll and by how much aggregate retirement savings would increase. Nevertheless, given the significant potential for MEPs to expand access to affordable retirement plans, the Department has concluded that this proposed rule would deliver social benefits that justify its costs. Its analysis is explained more fully below.

2. Executive Orders

Executive Orders 12866
51

and 13563
52

direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects; distributive impacts; and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility.

51
58 FR 51735 (Oct. 4, 1993).

52
76 FR 3821 (Jan. 21, 2011).

Under Executive Order 12866, “significant” regulatory actions are subject to review by the Office of Management and Budget (OMB). Section 3(f) of the Executive Order defines a “significant regulatory action” as an action that is likely to result in a rule: (1) Having an annual effect on the economy of $100 million or more in any one year, or adversely and materially affecting a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local or tribal governments or communities (also referred to as “economically significant”); (2) creating a serious inconsistency or otherwise interfering with an action taken or planned by another agency; (3) materially altering the budgetary impacts of entitlement grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) raising novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in the Executive Order. It has been determined that this proposed rule is economically significant within the meaning of section 3(f)(1) of the Executive Order. Therefore, OMB has reviewed the proposed rule pursuant to the Executive Order. The background to the proposed rule is discussed earlier in this preamble. This section assesses the expected economic effects of the proposed rule.

3. Introduction and Need for Regulation

While many Americans have accumulated significant retirement savings, many others have little, if any, assets saved for retirement. For example, the Employee Benefit Research Institute projects that 24 percent of the population aged 35-64 will experience a retirement savings shortfall, meaning resources in retirement will not be sufficient to meet their average retirement expenditures.
53

If uncovered long-term care expenses from nursing homes and home health care are included in the retirement readiness calculation, 43 percent of that population will experience a shortfall, and the projected retirement savings deficit is $4.13 trillion.
54

53
Jack VanDerhei, “EBRI Retirement Security Projection Model ®(RSPM)—Analyzing Policy and

Design Proposals,”
Employee Benefit Research Institute Issue Brief,
no. 451 (May 31, 2018).

54

Id.

Among all workers aged 26 to 64 in 2013, 63 percent participated in a retirement plan either directly or through a working spouse. That percentage ranged, however, from 52 percent of those aged 26 to 34 to 68 percent of those aged 55 to 64; and from 25 percent for those with adjusted gross income (AGI) less than $20,000 per person to 85 percent for those with AGI of $100,000 per person or more.
55

55
Peter J. Brady, “Who Participates in Retirement Plans,”
ICI Research Perspective,
vol. 23, no. 05, (July 2017.).

Workplace retirement plans often provide a more effective way for employees to save for retirement than saving in their own IRAs. Compared with IRAs, workplace retirement plans provide employees with: (1) Higher contribution limits; (2) generally lower investment management fees as the size of plan assets increases; (3) a well-established uniform regulatory structure with important consumer protections, including fiduciary obligations, recordkeeping and disclosure requirements, legal accountability provisions, and spousal protections; (4) automatic enrollment; and (5) stronger protections from creditors.
56

At the same time, workplace retirement plans provide employers with choice among plan features and the flexibility to tailor retirement plans that meet their business and employment needs.

56
Section 522 of the Bankruptcy Code (11 U.S.C. 522), provides an unlimited exemption for SEP and Simple IRAs, and pension, profit sharing, and qualified plans, such as 401(k)s, as well as plan assets that are rolled over to an IRA. However, other traditional IRAs and Roth IRAs are protected up to a value of $1,283,025 per person for 2018 (inflation adjusted).

In spite of these advantages, many workers, particularly those employed by small employers and the self-employed, lack access to workplace retirement plans. Table 1 below shows that at business establishments with fewer than 50 workers, 49 percent of the workers have access to retirement benefits.
57

In contrast, at business establishments with more than 500 workers, 88 percent

of workers have access to retirement benefits. Table 1 also shows that many small employers do not offer a retirement plan to their workers.
58

57
These statistics apply to private industry. U.S. Bureau of Labor Statistics, National Compensation Survey, Employee Benefits in the U.S. (March 2018).

58

Id.

Table 1—Retirement Plan Coverage by Employer Size

Establishment size: Number of workers
Workers:

Share with
access to a
retirement plan
(%)

Share
participating
in a
retirement plan
(%)

Establishments:

Share offering a
retirement plan
(%)

1-49
49
34
45

50-99
65
46
75

100-499
79
58
88

500+
89
76
94

All
66
50
48

Source: These statistics apply to private industry. U.S. Bureau of Labor Statistics, National Compensation Survey, Employee Benefits in the U.S. (March 2018).

Surveys of employers have suggested several reasons employers—especially small businesses—do not offer a workplace retirement plan to their employees. Regulatory burdens and complexity add costs and can be significant disincentives. A survey by the Pew Charitable Trusts found that only 53 percent of small-to mid-sized businesses offer a retirement plan, and 37 percent of those not offering a plan cited cost as the main reason.
59

Employers often also cite annual reporting costs and exposure to potential fiduciary liability as major impediments to plan sponsorship.
60

59
The Pew Charitable Trusts, “Employer Barriers to and Motivations for Offering Retirement Benefits,”
Issue Brief
(June 21, 2017).
http://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2017/06/employer-barriers-to-and-motivations-for-offering-retirement-benefits#0-overview.

60
See U.S. Government Accountability Office, GAO-12-326: “Private Pensions: Better Agency Coordination Could Help Small Employers Address Challenges to Plan Sponsorship” (March 2012) at 18-19. (
https://www.gao.gov/products/GAO-12-326
).

Some employers may also have not offered retirement benefits because they do not perceive such benefits as necessary to recruit and retain good employees.
61

In focus groups, many employers not offering retirement benefits reported believing that their employees would prefer to receive higher salaries, more paid time-off, or health insurance benefits than retirement benefits.
62

Small employers themselves may not have much incentive to offer retirement benefits because they are not sure how long their businesses are going to survive. This may lead them to focus on short-term concerns rather than their employees' long-term well-being. In analyzing new establishments, researchers found that 56 percent did not survive for four years.
63

61
Employee Benefit Research Institute, “Low Worker Take Up of Workplace Benefits May Impact Financial Wellbeing” (April 10, 2018).

62
The Pew Charitable Trusts, “Employer Barriers to and Motivations for Offering Retirement Benefits,” 2017.

63
Amy E. Knaup and Merissa C. Piazza, “Business Employment Dynamics data: survival and longevity, II,” Monthly Labor Review (Sept. 2007).

Many small businesses also may have not taken advantage of the existing opportunities to establish workplace retirement savings plans because of a lack of awareness. As found in a Pew survey, two-thirds of small and midsize employers that were not offering a retirement plan said they were not at all familiar with currently available options such as Simplified Employee Pension (SEP) and Savings Incentive Match Plan for Employees (SIMPLE) plans.
64

64
The Pew Charitable Trusts, “Employer Barriers to and Motivations for Offering Retirement Benefits,” 2017.

MEPs may address several of these issues. Specifically, to the extent that MEPs reduce the total cost of providing various types of plans to small employers, market forces may lead MEPs to offer and promote such plans to small employers that would otherwise have been overlooked because of high costs. Moreover, groups or associations and PEOs sponsoring MEPs sometimes may have more success raising (1) the awareness of retirement savings plan options for small employers, particularly where such employers are already clients or members, and (2) the benefits of establishing such plans as a tool for recruiting or retaining qualified workers.

Small businesses typically have fewer administrative efficiencies and less potential bargaining power than large employers do. The proposal could provide a way for small employers and the self-employed to band together in MEPs that, as single, large plans, have some of the same economic advantages as other large plans. As discussed above, the Department's prior subregulatory guidance limits the ability of small employers and self-employed individuals to join MEPs and thereby to realize attendant potential administrative cost savings. With certain exceptions, each employer operating a separate plan must file its own Form 5500 annual report, and generally, if the plan has 100 or more participants, an accountant's audit of the plan's financial position instead of relying on the audit of a combined plan.
65

Each small employer also would have to obtain a separate fidelity bond satisfying the requirements of ERISA.
66

65
Note that ERISA regulations exempt small plans, generally those with under 100 participants, from the audit requirement if they meet certain conditions. 29 CFR 2520.104-46. In 2015, more than 99 percent of small defined contribution pension plans that filed the Form 5500 or the Form 5500-SF did not attach an audit report.

66
ERISA section 412 and related regulations (29 CFR 2550.412-1 and 29 CFR part 2580) generally require every fiduciary of an employee benefit plan and every person who handles funds or other property of such plan to be bonded. ERISA's bonding requirements are intended to protect employee benefit plans from risk of loss due to fraud or dishonesty on the part of persons who handle plan funds or other property. ERISA refers to persons who handle funds or other property of an employee benefit plan as plan officials. A plan official must be bonded for at least 10% of the amount of funds he or she handles, subject to a minimum bond amount of $1,000 per plan with respect to which the plan official has handling functions. In most instances, the maximum bond amount that can be required under ERISA with respect to any one plan official is $500,000 per plan; however, the maximum required bond amount is $1,000,000 for plan officials of plans that hold employer securities.

As stated earlier in this preamble, on August 31, 2018, President Trump issued Executive Order 13847,

“Strengthening Retirement Security in America,” stating that “[i]t shall be the policy of the Federal Government to promote programs that enhance retirement security and expand access to workplace retirement savings plans for American workers.” The Executive Order directed the Secretary of Labor to examine policies that would: (1) Clarify and expand the circumstances under which United States employers, especially small and mid-sized businesses, may sponsor or participate in a MEP as a workplace retirement savings option offered to their employees, subject to appropriate safeguards; and (2) increase retirement security for part-time workers, sole proprietors, working owners, and other entrepreneurial workers with non-traditional employer-employee relationships by expanding their access to workplace retirement savings plans, including MEPs. The Executive Order further directed, to the extent permitted by law and supported by sound policy, that the Department consider within 180 days of the date of the Executive Order whether to issue a notice of proposed rulemaking, other guidance, or both, that would clarify when a group or association of employers, or other appropriate business or organization could be an “employer” within the meaning of ERISA section 3(5).

In response to the Executive Order, the Department has conducted a thorough review of its current policies regarding MEPs and determined that its existing interpretive position is unnecessarily narrow. The Department has concluded that regulatory action is appropriate to establish greater flexibility in the regulatory standards governing the criteria that must exist in order for an employer group or association or PEO to sponsor a MEP.

The proposed rule generally would provide this flexibility by making five important changes to the Department's prior subregulatory guidance. First, it would clarify the existing requirement in prior subregulatory guidance that bona fide groups or associations must have at least one substantial business purpose unrelated to the provision of benefits. Second, it would relax the requirement that group or association members share a common interest, as long as they operate in a common geographic area. Third, it would make clear that groups or associations whose members operate in the same industry could sponsor MEPs, regardless of geographic distribution. Fourth, it would clarify that working owners without employees are eligible to participate in MEPs sponsored by bona fide employer groups or associations that meet the requirements of the proposal. Fifth, it would establish criteria under which “bona fide” PEOs may sponsor MEPs covering the employees of their client employers.

The proposed criteria also result in more MEPs being treated consistently under the Code and title I of ERISA, and such consistency could remove another barrier inhibiting the broader establishment of MEPs. As discussed earlier in this preamble, a retirement plan covering employees of multiple employers that satisfies the requirements of IRC section 413(c) is considered a single plan under IRC section 413(c), which addresses the tax-qualified status of MEPs. Moreover, in Revenue Procedure 2002-21, 2002-1 C.B. 911, the IRS issued guidance that provided an avenue for PEOs to administer a MEP for the benefit of worksite employees of client organizations and not violate the exclusive benefit rule.
67

67
See Internal Revenue Code (IRC) section 413(c)(2) and § 1.413-2(c) of the Income Tax Regulations, which provide that, in determining whether a MEP is for the exclusive benefit of its employees (and their beneficiaries), all employees participating in the plan are treated as employees of each such employer. IRC sections 413(c)(1) and (3) provide that IRC sections 410(a) (participation) and 411 (minimum vesting standards) also are applied as if all employees of each of the employers who maintain the plan were employed by a single employer. Under Treas. Reg. § 1.413-2(a)(2), a plan is subject to the requirements of IRC section 413(c) if it is a single plan and the plan is maintained by more than one employer.

See generally Treas. Reg. §§ 1.413-1(a)(2),1.413-2(a)(2), and 1.414(l)-1(b)(1). However, the minimum coverage requirements of IRC section 410(b) and related nondiscrimination requirements are generally applied to a MEP on an employer-by-employer basis.

By establishing greater flexibility in the standards and criteria for sponsoring MEPs than previously articulated in subregulatory interpretive rulings under ERISA section 3(5), the proposed regulation would facilitate the adoption and administration of MEPs and expand access to, and lower the cost of, workplace retirement savings plans, especially for employees of small employers and certain self-employed individuals. At the same time, reflecting the position taken in its subregulatory guidance, the Department intends that the conditions included in the proposed regulation would continue to distinguish plans sponsored by entities that satisfy ERISA's definition of “employer” from arrangements or services offered by other entities.

4. Affected Entities

If finalized, the proposed rule may encourage both the creation of new MEPs and the expansion of existing MEPs. In order to determine the entities that this proposal would affect and its effects on those entities, the Department has reviewed the characteristics of existing MEPs that file Forms 5500.
68

As explained below, however, the information available on the Form 5500 includes both defined contribution and defined benefit MEPs. This proposed rule is limited to defined contribution pension plans and this document generally refers only to defined contribution MEPs (DC MEPs) when referring to “MEPs.” Because they are part of the multiple employer pension plan filing population, defined benefit MEPs are included in the discussion below to understand the universe of MEPs filing the form. This section uses the terms DC MEPs and DB MEPs to differentiate the types of plans that currently file Forms 5500.

68
“Forms 5500” refers collectively to the Form 5500 (Annual Return/Report of Employee Benefit Plan) and the Form 5500-SF (Annual Return/Report of Small Employee Benefit Plan).

Currently DC MEPs comprise only a small share of the private sector retirement system, as shown in Table 2.
69

Based on the latest available data, about 4,592 DC MEPs exist with approximately 5.1 million total participants, 4.1 million of whom are active participants. DC MEPs hold about $232 billion in assets.
70

69
EBSA performed these calculations using the 2015 Research File of Form 5500 filings. The estimates are weighted and rounded, which means they may not sum precisely. The Department derived these estimates by identifying plans that indicated “multiple employer plan” status on the Form 5500 Part 1 Line A. Then, the Department removed nine plans that upon further review appear to be multiemployer plans.

70

Id.

Table 2—Current Statistics on MEPs

Number of MEPs

Total
participants

Active
participants

Total assets

MEP DC Plans
4,592
5.1 million
4.1 million
$232 billion.

As a share of all ERISA DC plans
0.7%
5.3%
5.3%
4.4%.

MEP DC Plans
4,592
5.1 million
4.1 million
$232 billion.

401(k) Plans
4,345
4.8 million
3.9 million
$216 billion.

Other DC Plans
248
0.4 million
0.3 million
$15 billion.

MEP DC Plans
4,592
5.1 million
4.1 million
$232 billion.

MEP DB Plans
242
1.5 million
0.6 million
$132 billion.

Total MEP Plans
4,834
6.6 million
4.7 million
$363 billion.

Source: EBSA performed these calculations using the 2015 Research File of Form 5500 filings. The estimates are weighted and rounded, which means they may not sum precisely. The Department derived these estimates by identifying plans that indicated “multiple employer plan” status on the Form 5500 Part 1 Line A. Then, the Department removed nine plans that upon further review appear to be multiemployer plans.

Some MEPs are very large; 59 percent of total participants are in MEPs with 10,000 or more participants.
71

Furthermore, 98 percent of total participants are in MEPs with 100 or more participants. There are 47 MEPs holding over $1 billion in assets each.
72

In existing DC MEPs, 91.6 percent of participants direct all of the investments, another 5.6 percent direct the investment of a portion of the assets, and the remainder did not direct the investment of any of the assets.
73

71

Id.

72

Id.

73

Id.

There are caveats to keep in mind when interpreting the data presented in Table 2 above. For example, under the Department's prior subregulatory guidance, some plans established and maintained by groups of employers that might meet the conditions of the proposed rule, would currently be deemed to be individual plans sponsored by each of the employers in the group. In these circumstances, each participating employer is required to file a Form 5500 just as it would if it established its own plan. These filings are indistinguishable from typical single-employer plans and do not appear in the data set as identifiable multiple employer plans.
74

74
In addition, there are some plans that are erroneously indicating that they are “multiple employer plans” rather than “single-employer plans” under title I of ERISA. These plans may in fact be group or association or PEO-type MEPs that do not meet the conditions of the prior DOL subregulatory guidance. This distorts the database and leads to inaccurate estimates. In particular, the high number of plans erroneously reporting that they are MEPs likely overestimates the number of existing MEPs for purposes of title I of ERISA and underestimates the average size of MEPs.

As stated earlier in this preamble, PEOs generally are entities that enter into agreements with client employers to provide certain employment responsibilities, such as tax withholding, to the individuals who perform services for the client employers. At the end of 2017, there were 907 PEOs operating in the United States, providing services to 175,000 client employers with 3.7 million employees.
75

The proposed rule would allow certain PEOs meeting the requirements of paragraph (c) to sponsor MEPs and offer coverage to their client employers' employees.

75
Laurie Bassi and Dan McMurrer, “An Economic Analysis: The PEO Industry Footprint in 2018,” National Association of Professional Employer Organizations, September 2018, available at
https://www.napeo.org/docs/default-source/white-papers/2018-white-paper-final.pdf?sfvrsn=6
.

This proposal would benefit many workers that might otherwise tend to lack access to high-quality, affordable, on-the-job retirement savings opportunities. These workers include self-employed individuals, sole proprietors without employees, participants in the “gig” economy, “contingent” workers, and workers in various “alternative” work arrangements. Although there are other retirement savings vehicles available to these workers, the workers in these categories are less likely to access and participate in retirement plans. For example, only six percent of self-employed individuals participated in retirement plans in 2013.
76

Among contingent workers, only 23 percent were eligible to participate in employer- provided retirement plans in 2017.
77

The proposal would provide many of these workers with a new opportunity to access a retirement plan by joining a MEP. Approximately 8 million self-employed workers between ages 21 and 70, representing 6 percent of all similarly aged workers, have no employees and usually work at least 20 hours per week, and under this proposal would become eligible to join MEPs.
78

These workers are involved in a wide range of occupations: l\Lawyers, doctors, real estate agents, childcare providers, as well as “gig economy” workers, who provide on-demand services, often through online intermediaries, such as ride-sharing online platforms. In many respects, the self-employed are quite different from employees in a traditional employer-employee arrangement. For example, self-employed persons often have complex work arrangements—they are more likely to work part-time or hold multiple jobs.
79

76
Craig Copeland, “Employment-Based Retirement Plan Participation: Geographic Differences and Trends, 2013,”
EBRI Issue
Brief, no. 405, October 2014. In this report, the self-employed include mostly unincorporated self-employed.

77
Bureau of Labor Statistics, “Contingent and Alternative Employment Arrangements—May 2017,” June 7, 2018.

78
DOL tabulations of the June 2018 Current Population Survey basic monthly data.

79
For tax administrative data, see Emilie Jackson, Adam Looney, and Shanthi Ramnath, “The Rise of Alternative Work Arrangements: Evidence and Implications for Tax Filing and Benefit Coverage.” U.S. Department of Treasury, Office of Tax Analysis, Working Paper 114 (January 2017). For survey data, see the Survey of Business Owners and Self-Employed Persons, 2012 from the Census Bureau at
https://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=SBO_2012_00CSCBO04&prodType=table.

Gig economy workers, in particular, may face obstacles to saving for retirement. 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.
80

Relatively few gig workers have access to employer-sponsored retirement plans,

one survey found.
81

According to another survey, many traditional workers who pursue gig work on the side do so at least partly to help them save more for retirement. On the other hand, most of those for whom gig work is their main job have less than $1,000 set aside for retirement.
82

MEPs could help raise awareness and ease entry to retirement coverage for broad classes of gig workers such as on-demand drivers or workers in cities where gig work is common.

80
For related information see, for example, Jonathan Kahler, “Retirement planning in a `gig economy',” Vanguard, June 13, 2018, available at
https://vanguardblog.com/2018/06/13/retirement-planning-in-a-gig-economy/,
which explains that a gig worker is “running your own HR department and you're the benefits manager, which means taking sole responsibility for your retirement.”

81
“Gig Workers in America: Profiles, Mindsets, and Financial Wellness,” Prudential, 2017, available at
http://research.prudential.com/documents/rp/Gig_Economy_Whitepaper.pdf.

82
“Gig Economy and the Future of Retirement,” Betterment, 2018, available at
https://www.betterment.com/wp-content/uploads/2018/05/The-Gig-Economy-Freelancing-and-Retirement-Betterment-Survey-2018_edited.pdf.
This same survey found, however, that most gig workers are paying off debt. It is sometimes better to retire debt before saving aggressively for retirement.

According to the May 2017 Contingent Worker Supplement survey, 3.8 percent of workers identified themselves as “contingent” workers,
83

meaning they did not expect their jobs to last or reported that their jobs were temporary. About 10 percent of workers fell under “alternative,” non-traditional work arrangements that include independent contractors, on-call workers, temporary help agency workers, and workers provided by contract firms.
84

The group of contingent workers and the group of workers in alternative arrangements overlap. Using a different survey, Katz and Krueger, found that the share of workers in alternative arrangements was approximately 15.8 percent in 2015.
85

83
U.S. Bureau of Labor Statistics, “Contingent and Alternative Employment Arrangements—May 2017” (June 7, 2018).

84

Id.

85
Lawrence F. Katz & Alan B. Krueger, “The Rise and Nature of Alternative Work Arrangements in the United States, 1995-2015,” (June 18, 2017). This survey has a smaller sample size than the Contingent Worker Survey conducted by the Bureau of Labor Statistics.

Policymakers have expressed concern about whether some gig workers, and, more generally self-employed persons, have access to retirement plans and adequately save for retirement. According to the Contingent Worker Survey, in 2017, 23 percent of contingent workers were eligible to participate in employer provided retirement plans, which is substantially lower than the corresponding 48 percent figure for non-contingent workers. Workers in alternative arrangements (13 percent for temporary help agency workers, 35 percent for on-call workers, and 48 percent for workers provided by contract firms) were less likely than workers with traditional arrangements (51 percent) to be eligible for employer-provided retirement plans.
86

Thus, by allowing the self-employed to participate in MEPs, the proposal would increase retirement plan access for them.

86
The self-employed—both incorporated and unincorporated—and the independent contractors were excluded from calculating these percentages.
See
U.S. Bureau of Labor Statistics, “Contingent and Alternative Employment Arrangements—May 2017” (2018).

5. Benefits

a. Expanded Access to Coverage

Generally, employees rarely choose to save for retirement outside of the workplace, despite having options to save in tax-favored savings vehicles, such as investing either in traditional IRAs or Roth IRAs. Thus, the availability of workplace retirement plans is a significant factor affecting whether workers save for their retirement. Yet, despite the advantages of workplace retirement plans, access to such plans for employees of small businesses is relatively low. The proposal's expansion of access to certain MEPs would enable groups of private-sector employers to participate in a collective retirement plan and provide employers with another efficient way to reduce some costs of offering workplace retirement plans. Thereby, more plan formation and broader availability of such plans would occur, especially among small employers.

The MEP structure could address significant concerns from employers about the costs to set up and administer retirement benefit plans. In order to participate in a MEP, employers generally would be required to execute a participation agreement or similar instrument setting forth the rights and obligations of the MEP and participating employers. These employers would then be participating in a single plan, rather than sponsoring their own separate, individual ERISA-covered plan; therefore the employer group or association or PEO would be acting as the “employer” sponsoring the MEP within the meaning of section 3(5) of ERISA. That employer group or association typically, or in the case of PEOs always, would assume the roles of plan administrator and named fiduciary. The individual employers would not be directly responsible for the MEP's overall compliance with ERISA's reporting and disclosure obligations. Accordingly, the MEP structure could address small employers' concerns regarding the cost associated with fiduciary liability of sponsoring a retirement plan by effectively transferring much of the legal risks and responsibilities to professional fiduciaries who would be responsible for managing plan assets and selecting investment menu options, among other things. Participating employers' continuing involvement in the day-to-day operations and administration of their MEP generally could be limited to enrolling employees and forwarding voluntary employee and employer contributions to the plan. Thus, participating employers could keep more of their day-to-day focus on managing their businesses, rather than their pension plans.

Congress has repeatedly enacted legislation intended to lower costs, simplify requirements, and ease administrative burdens for small employers to sponsor retirement plans. For example, the Revenue Act of 1978
87

and the Small Business Job Protection Act of 1996
88

established the SEP IRA plan and the SIMPLE IRA plan, respectively, featuring fewer compliance requirements than other plan types. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)
89

included provisions that are intended to increase access to retirement plans for small businesses by: (1) Eliminating top-heavy testing requirements for safe harbor 401(k) plans; (2) increasing contribution limits for employer-sponsored IRA plans and 401(k) plans; and (3) creating tax credits for small employers to offset new plan startup costs and for individuals within certain income limits who make eligible contributions to retirement plans. Despite these legislative efforts to increase access to retirement savings plans for small employers, as shown in Table 1, above, the percentage of the U.S. workforce participating in a workplace retirement plan remains around 50 percent. Therefore, a critical question is whether MEPs meeting the requirements of the proposal can increase access to workplace retirement plans when other initiatives have had limited effect. Several factors indicate to the Department that they can.

87
Public Law 95-600, sec. 152, 92 Stat. 2763, 2791.

88
Public Law 104-188, sec. 1421, 110 Stat. 1755, 1792.

89
Public Law 107-16, 115 Stat. 38.

First, the Department believes that employers may be more likely to participate in a MEP sponsored by a PEO, group, or association of employers with which they have a pre-existing relationship based on trust, familiarity, and efficiency stemming from that relationship. For example, a PEO that performs payroll or human resources

services for an employer would have connected information technology infrastructures that would facilitate efficient transfers of employee and employer contributions. Similarly, small employers obtaining health insurance coverage through an AHP sponsored by a group or association may find it convenient and cost effective to establish retirement plans offered by the same group or association. In many cases, the group or association and small employers may link their information technology systems to collect health care premiums from participating employers,
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and that infrastructure could also be used to collect retirement contributions, resulting in IT-related start-up costs savings. In addition, small employers' and self-employed individuals may encounter fewer administrative burdens if the same group or association administers both their health and retirement plans.

90
In the analogous context of health plans, the Department recently issued a final regulation that enhances the ability of unrelated employers to band together to provide health benefits through a single ERISA-covered plan called an AHP. The AHP Rule, which was issued on June 21, 2018, expands access to more affordable, quality health care by amending the definition of “employer” under section 3(5) of ERISA for AHPs. Similar to this proposal, the AHP Rule established alternative criteria under ERISA's section 3(5) definition of employer to permit more groups or associations of employers to establish a multiple employer group health plan that is a single employee welfare benefit plan within the meaning of ERISA section 3(1) of ERISA.

Second, employers may be incentivized to sponsor these plans based on cost savings that may occur when payroll services are integrated with retirement plan record-keeping systems. Several firms in the market already provide payroll services and plan record-keeping services particularly tailored to small employers.
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These firms can afford to provide these integrated services at a competitive price, suggesting that integrating these services could lead to some efficiency gains. Since PEOs already provide payroll services to client employers, a MEP sponsored by a PEO can reap the benefits of integrating these services, which can in turn benefit participating employers through lower fees and ease of administration. According to a survey of small employers, those with outsourced payroll systems are twice as likely to begin offering a retirement plan in the next two years as those that handle their payroll internally.
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This may be evidence of causation: Outsourcing payroll may encourage employers to offer retirement plans because it makes such offering less costly, as some of the information technology infrastructure necessary to maintain a retirement plan already is in place. On the other hand, this might be mere correlation, wherein small employers generating steady revenue streams are more likely to outsource payroll systems and also more likely to sponsor retirement plans in the near future because they are generally more financially secure.

91
Cerulli Associates,
U.S. Retirement Markets 2016
(available at
https://www.cerulli.com/vapi/public/getcerullifile?filecid=Cerulli-US-Retirement-Markets-2016-Information-Packet
).

92
The Pew Charitable Trusts, “Employer Barriers to and Motivations for Offering Retirement Benefits,” 2017.

As further discussed in the uncertainty section below, the Department does not have sufficient data to determine precisely the likely extent of participation by small employers and the self-employed in MEPs under the proposal. However, overall, the Department believes that the proposed rule would provide a new valuable option for small employers and the self-employed to adopt retirement savings plans for their employees, which could increase access to retirement plans for many American workers.

b. Reduced Fees and Administration Savings

Many MEPs would benefit from scale advantages that small businesses do not currently enjoy, and MEPs would pass some of the attendant savings onto participating employers and participants.
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Grouping small employers together into a MEP could facilitate savings through administrative efficiencies (economies of scale) and sometimes through price negotiation (market power). The degree of potential savings may be different for different types of administrative functions. For example, scale efficiencies can be very large with respect to asset management, and may be smaller, but still meaningful, with respect to recordkeeping.

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See, e.g.,
BlackRock, “Expanding Access to Retirement Savings for Small Business,”
Viewpoint
(Nov. 2015).

Large scale may create two distinct economic advantages for MEPs. First, as scale increases, marginal costs for MEPs would diminish, and MEPs would spread fixed costs over a larger pool of member employers and employee participants, creating direct economic efficiencies. Second, larger scale may increase the negotiating power of MEPs. Negotiating power matters when competition among financial services providers is less than perfect and they can command greater profits than in an environment with perfect competition. Very large plans may sometimes exercise their own market power to negotiate lower prices, translating what would have been higher revenue for financial services providers into savings for member employers and employee participants.

There may be times when scale efficiencies would not translate into savings for small employer members and their employee participants because regulatory requirements applicable to large MEPs may be more stringent than those applicable to most separate small plans. For example, some small plans are exempt from annual reporting requirements, and many others are subject to more streamlined reporting requirements than larger plans.

But in most cases, the savings from scale efficiency of MEPs would be larger than the savings from scale efficiencies that other providers of bundled financial services could offer to small employers. First, the market position of MEPs would sometimes provide

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2018-23065. Public record. Not legal advice.