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

Federal RegisterJul 31, 2019

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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:

Final rule.

SUMMARY:

This document contains a final regulation under title I of the Employee Retirement Income Security Act (ERISA) that expands 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 multiple employer workplace retirement plan under title I of ERISA (as opposed to providing an arrangement that constitutes multiple separate retirement plans). The final regulation does this by clarifying that employer groups or associations and PEOs can, when satisfying certain criteria, constitute “employers” within the meaning of ERISA for purposes of establishing or maintaining an individual account “employee pension benefit plan” within the meaning of ERISA. As an “employer,” a group or association, as well as a PEO, can sponsor a defined contribution retirement plan for its members (collectively referred to as “multiple employer plans” or “MEPs” unless otherwise specified). Thus, different businesses may join a MEP, either through a group or association or through a PEO. The final regulation also permits certain working owners without employees to participate in a MEP sponsored by an employer group or association. The final rule primarily affects groups or associations of employers, PEOs, plan participants, and plan beneficiaries. It does not affect whether groups, associations, or PEOs assume joint-employment relationships with member-employers or client employers. But it may affect banks, insurance companies, securities broker-dealers, record keepers, and other commercial enterprises that provide retirement-plan products and services to ERISA plans and plan sponsors.

DATES:

This final regulation is effective on September 30, 2019.

FOR FURTHER INFORMATION CONTACT:

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

SUPPLEMENTARY INFORMATION:

A. Background

1. Need To Expand Access to Workplace Retirement Plans

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.

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.

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

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 (

https://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).

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-unitedstates-march-2018.pdf

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.

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

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.

Id.

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

)

The Department calculated this using

Survey of Income and Program Participation 2008 Panel

Data Waves 10 and 11.

Cost and regulatory complexity discourage employers—especially small businesses—from offering workplace retirement plans for their employees. Establishing and maintaining a plan can be 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.

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

The Pew Charitable Trusts, Employer Barriers to and Motivations for Offering Retirement Benefits,

(June 2017) (

http://www.pewtrusts.org/-/media/assets/2017/09/employerbarrierstoandmotivations.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.”).

Two other types of pension arrangements share features of MEPs, but are not the focus of this rule. First, 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. Second, Pre-Approved Retirement Plans, are plans that providers, such as financial institutions, make available for adoption by employers and that have been pre-approved by the IRS. 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 centralized administration services and pool the assets of different plans into a central investment fund, such as an IRS Rev. Rul. 81-100 group trust.

Although there are ways to save for retirement outside of the workplace, none are as advantageous to workers as employment-based plans. IRAs, for example, are not comparable to workplace retirement savings options. As compared to IRAs, ERISA-covered retirement plans offer private sector workers: (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 enhance employers' ability to choose among a wide variety of plan features and the flexibility to tailor retirement plans to meet their business and employment needs.

Although many MEPs already exist, past sub-regulatory guidance issued by the Department and uncertainty about the ability of PEOs and associations to sponsor MEPs as “employers” may have hindered the creation of MEPs. As the Department also learned through its “association health plan” rulemaking process (AHP Rule), described in section 3 of this preamble, many employer groups and associations are interested in offering employee benefits to their members, but view the Department's prior interpretive guidance as too restrictive, creating an undue impediment to greater sponsorship of retirement plans. Likewise, we understand that 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.

The IRS has already recognized that a PEO may offer a MEP for its clients under the Code. See IRS Rev. Proc. 2002-21 (describing steps that may be taken to ensure the qualified status of defined contribution multiple employer plans maintained by PEOs).

2. Legislative Activity

In recent years, members of Congress have also sought to promote MEPs through legislation, including recent legislative proposals that address so-called “open MEPs,” which are plans that cover employees of employers with no relationship other than their joint participation in the MEP. Since the publication of the proposal and the beginning of the 116th Congress, seven bills dealing with this topic have been introduced, including H.R. 1994, the “Setting Every Community Up for Retirement and Enhancement Act of 2019,” commonly known as the “SECURE Act,” which was passed overwhelmingly by the House of Representatives on May 23, 2019 by a vote of 417-3.

The SECURE Act, in relevant part, makes comprehensive changes to ERISA and the Code to facilitate open MEPs. The final rule differs in significant ways from the legislative proposals introduced in Congress. In particular, this rule is significantly more limited in scope 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 Code.

The SECURE Act had originally been introduced on March 22, 2019 on a bipartisan basis by House Ways and Means Chairman Richard Neal (D-MA), Ranking Member Kevin Brady (R-TX), Rep. Mike Kelly (R-PA) and Rep. Ron Kind (D-WI). The SECURE Act contains the MEP provisions found in S. 972/H.R. 1007, the “Retirement and Enhancement Savings Act of 2019” or “RESA,” introduced by Senate Finance Committee Chair Charles Grassley (R-IA) and Ranking Member Sen. Ron Wyden (D-OR) on April 1, 2019 and Rep. Ron Kind (D-WI) and 38 cosponsors on February 6, 2019, respectively, and H.R. 1084, the “Family Savings Act,” introduced in February 7, 2019 by Rep. Mike Kelly (R-PA) and 9 cosponsors. The other three MEP bills introduced in the 116th Congress are H.R. 198, the “Retirement Security for American Workers Act,” introduced by Reps. Vern Buchanan (R-FL) and Ron Kind (D-WI) on March 27, 2019; S. 1101, the “Small Business Employees Retirement Enhancement Act, introduced by Sens. Tom Cotton (R-AR), Todd Young (R-IN), and Doug Jones (D-AL) on April 3, 2019; and S. 321, the “Retirement Security Act of 2019, introduced by Sens. Susan Collins (R-ME) and Maggie Hassan (D-NH) on February 4, 2019. In the 115th Congress, there were eight bills introduced containing MEP provisions.

3. Association Health Plan Rule

As mentioned above, 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.” 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).

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 scope of that rule or a new rule. In the AHP Rule, the Department said it would consider those comments in the retirement plan context.

83 FR 28912 (June 21, 2018). In

State of New York

United States Department of Labor,

363 F. Supp. 3d 109 (D.D.C. March 28, 2019), the District Court vacated portions of the Department's final rule on AHPs. The Department disagrees with the District Court's ruling and an appeal has been filed.

Id.

at 28964, n.10.

4. Executive Order 13847

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 nontraditional 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 has authority to interpret the statutes it administers, and it believes that it is appropriate to clarify how the statutory definition of “employer,” 29 U.S.C. 1002(5), should apply to certain MEPs under title I of ERISA. For several reasons, the Department has chosen to retain nearly the same criteria for these MEPs that it proposed. The Department is not opining, however, on whether other types of MEPs with different or less-stringent criteria, or different “employers,” may also qualify under title I. The Department had previously issued subregulatory guidance interpreting this section 3(5) of ERISA 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 expects to improve access to employer-

sponsored retirement savings plans in America.

The Department, therefore, is publishing this final rule interpreting the term “employer” for purposes of ERISA section 3(5). This rule facilitates the adoption and administration of MEPs and thereby expands access to workplace retirement plans, especially for employees of small and mid-size employers and for certain self-employed individuals. This final rule supersedes any preexisting subregulatory interpretive rulings under ERISA section 3(5) pertaining to bona fide groups or associations of employers and, at the same time, establishes more flexible standards and criteria for sponsorship of MEPs than currently articulated in that prior guidance. The final rule does not affect existing auto-enrollment options and other features that make defined contribution plans attractive for employers. The final rule also has no superseding effect on Interpretive Bulletin 2015-02, as further explained below in the “Miscellaneous” section of this preamble.

5. Notice of Proposed Rulemaking

On October 23, 2018, the Department published a proposed regulation (“Proposed Rule”) to clarify certain circumstances under which an employer group or association or a PEO may sponsor a MEP. More specifically, the Proposed Rule clarified 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 “employee pension benefit plan” within the meaning of ERISA section 3(2). Under the terms of the Proposed Rule, a group or association, as well as a PEO, could sponsor a MEP as an “employer.” The Proposed Rule permitted different businesses to join a MEP, either through a group or association or through a PEO. The Proposed Rule also permitted certain working owners without employees to participate in a MEP sponsored by a group or association.

The Proposed Rule identified the potential advantages of scale offered by MEPs. MEPs have the potential to broaden the availability of workplace retirement plans, especially among small employers, because they enable different businesses to band together and adopt a single retirement plan. Pooling resources in this way can reduce costs and encourage 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.

The Proposed Rule also identified other potential advantages of MEPs. 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 retain fiduciary responsibility for choosing and monitoring the arrangement and forwarding required contributions to the MEP, the employer can keep more of its day-to-day focus on managing its business, rather than the MEP.

Under the Proposed Rule, participating employers were generally 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 participating employers were not viewed as sponsoring their own separate, individual plans under ERISA. Rather, the MEP, if it met the conditions of the Proposed Rule, constituted a single employee benefit plan for purposes of title I of ERISA. Consequently, the MEP sponsor—and not the individual participating employers—generally was 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 had to act as plan administrators under ERISA section 3(16) or as named fiduciaries under section 402 of ERISA.

The Proposed Rule provided that an employer group or association or PEO could act 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 the Proposed Rule is 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, a MEP also has to satisfy the requirements of section 210(a) of ERISA.

6. Legal Background

a. 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, as relevant here, 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 engaged in commerce or in any industry or activity affecting commerce . . . .” 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 income to the termination of employment or beyond. Thus, the term “employer” is essential to a benefit arrangement's status as an “employee pension benefit plan” within the meaning of ERISA. A prerequisite for ERISA coverage is that the retirement plan must be established or maintained by an “employer.”

ERISA also covers benefit plans established or maintained by employee organizations and such plans established or maintained 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, in relevant part, states that 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 carried forward this important definition from the 1958 Welfare and Pension Plans Disclosure Act. Public Law 85-836, section 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

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.”

See Mass. Laborers' Health & Welfare Fund

Starrett Paving Corp.,

845 F.2d 23, 24 (1st Cir. 1988);

accord Greenblatt

Delta Plumbing & Heating Corp.,

68 F.3d 561, 575 (2d Cir. 1995) (collecting cases). Also ambiguous is the statutory term “group or association of employers.” Because ERISA “does not define th[at] term,” this “void injects ambiguity into the statute.”

MD Physicians & Assocs.

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 well-positioned to address this statutory ambiguity by exercising its rulemaking authority,

see

29 U.S.C. 1135, 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.

b. Bona Fide Groups or Associations

The Department has long taken the position in subregulatory guidance 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.

DOL guidance generally refers to these entities—

i.e.,

entities that qualify as groups or associations, within the meaning of section 3(5)—as “bona fide” employer groups or associations.

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.

Largely, but not exclusively, in the context of welfare-benefit plans, the Department has previously distinguished employer groups or associations that can act as ERISA section 3(5) employers in sponsoring multiple employer plans 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 plan that is unrelated to the provision of benefits.

See

83 FR at 28912, 28920.

See, e.g.,

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

See

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

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.

c. 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.”

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 client contract, the PEO assumes responsibility for paying the employees and for related employment tax compliance, and has attendant 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.

According to a representative of the PEO industry, 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.

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

Foster, Michael D.,

Certified Professional Employer Organizations

(July 7, 2016)

https://www.jacksonkelly.com/tax-monitor-blog/certified-professional-employer-organizations.

(i) 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). 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).

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

The lack of a specific and clear test leads to different outcomes.

Compare Yearous

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

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).

(ii) Current Secondary Legal Authority

Some federal statutes treat a PEO as an “employer” for certain 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.

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.

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

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 certifies PEOs that meet certain requirements within the Code and provides a level of assurance to small-business owners that rely on such a Certified Professional Employer Organization (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. Pursuant to its certification as a CPEO, 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)).”

See

IRC section 3511(a)(1).

B. Overview of the Final Rule and Discussion of Public Comments

1. In 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 in the final rule, offer many small businesses more affordable and less burdensome retirement savings plan alternatives than are currently available. MEPs provide another avenue for those employers that are reluctant to shoulder such burdens. In addition, the final rule will 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. Accordingly, the Department is confident that the final rule will prompt some small businesses that do not currently offer workplace retirement benefits to offer such benefits. This will increase the number of employees enrolled in workplace retirement plans, thereby offering some of America's workers better retirement savings opportunities and greater retirement security.

Paragraph (a) defines the scope of the final rule. This paragraph provides that bona fide employer groups or associations and bona fide PEOs may act as “employer[s]” under ERISA section 3(5) for purposes of sponsoring a MEP. This interpretation is based upon the Department's conclusion that such bona fide employer groups, associations, or PEOs can act “in the interest of ” their employer members in relation to a retirement savings plan.

Although the term “multiple employer plan” can refer to a variety of different kinds of employee-benefit arrangements, this final rule addresses only two kinds of arrangements: Sponsorship of a MEP by either a group or association of employers, or by a PEO. The final rule is also limited to defined contribution plans, as defined in section 3(34) of ERISA. The final rule does not cover welfare benefit plans or other types of pension plans.

Some commenters recommended expanding the scope of the Proposed Rule so that the final rule would cover other employee benefit plans. These commenters mentioned life, disability, and defined benefit pension plans in particular. At the same time, however, other commenters recommended that this rulemaking project remain limited to defined contribution plans. These commenters stated that different issues might arise under different employee benefit plan structures and different benefit options. These commenters preferred that the Department continue a discussion with interested parties on whether and how to implement a future regulatory expansion to cover these other employee benefit plans. After thoughtful review of these comments, however, the final rule is limited to defined contribution plans because the Department believes that consideration and development of any proposal covering other types of pension and welfare benefit plans or other persons or organizations as plan sponsors would benefit from public comments and additional consideration by the Department.

2. Open MEPs and Request for Information

The Proposed Rule solicited comments on so-called “open MEPs” or “pooled employer plans,” which generally are defined contribution retirement arrangements that cover employees of employers with no relationship other than their joint participation in the MEP. The Proposed Rule specifically requested comments on whether, and under what circumstances, these arrangements should and could be operated as ERISA-covered plans. The solicitation asked commenters who believe that these arrangements should be addressed in this or a future rulemaking to 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 were encouraged to provide suggestions regarding the regulatory conditions that should apply to these particular arrangements.

Nearly half of the comments received addressed this issue, and the majority were supportive of the Department promulgating a rule that would facilitate these arrangements. Nonetheless, commenters had very different ideas on how the Proposed Rule might best be amended to facilitate open MEPs. Some commenters, for example, recommended eliminating some or all of the substantial business purpose, control, and commonality requirements from the Proposed Rule's bona fide group or association provisions, and the provision that prohibits financial services firms from being the group or association that establishes the MEP. Other commenters, however, recommended modifications to, and an expansion of, the Proposed Rule's bona fide PEO provisions. These commenters argued that the bona fide PEO framework, with appropriate modifications, could be expanded beyond the narrow scope of PEOs to include commercial enterprises more generally. To these commenters, a commercial entity's willingness to exert substantial control over the functions and activities of the MEP, as the plan sponsor, plan administrator, and as a named fiduciary provides a sufficient basis to conclude that such an entity is acting “indirectly in the interest of an employer . . . in relation to an employee benefit plan” for purposes of section 3(5) of ERISA, without regard to whether the entity is a PEO.

Not all commenters, however, supported the idea of open MEPs. A number of commenters believed commercial entities and financial services firms should be precluded from

sponsoring MEPs as an “employer” under section 3(5) of ERISA. A few commenters viewed the matter as being better suited for legislation, given the wide range of issues presented under ERISA and the Code.

After reviewing the comments, the Department is persuaded that open MEPs deserve further consideration. The Department, however, does not believe that it has acquired a sufficient public record on, or a sufficiently thorough understanding of, the complete range of issues presented by the topic. In light of the conflict in the comments about whether and how to permit open MEPs, as well as legislation pending in the 116th Congress, the Department has decided to solicit comments on a broad range of issues relating to open MEPs in a Request for Information (RFI) published elsewhere today in the

Federal Register

for possible future rulemaking and to defer rulemaking on open MEPs until after a fuller public record is developed. Because of its interest, however, in expanding opportunities for small businesses and working owners to participate in MEPs as soon as possible, the Department is publishing this final rule today, which is limited to bona fide groups or associations and bona fide PEOs that may act as employers that establish and maintain MEPs.

3. Bona Fide Groups or Associations of Employers

Paragraph (b) of the final rule contains the provisions defining what is a bona fide group or association of employers capable of establishing a MEP.

These provisions replace and supersede criteria in prior subregulatory guidance dealing with retirement plans and bona fide groups or associations of employers. The criteria in paragraph (b) distinguish bona fide group or association MEPs from retirement products and services offered by purely commercial pension administrators, managers, and record keepers. 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. ERISA section 3(5) and ERISA title I's overall structure contemplate

employment

-based benefit arrangements.

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.

Thus, the criteria in paragraph (b) identify certain groups and associations that act as employers within the meaning of ERISA section 3(5), and distinguish those groups and associations from others that may not act as an “employer.”

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.

The Department took the same position in the AHP Rule. 83 FR 28912, 28913 (June 21, 2018).

Id.

at 28916.

The provisions in paragraph (b) generally mirror those in the final AHP Rule that define what is a bona fide group or association capable of establishing an association health plan.

These provisions have the same meaning and effect here, as they have there. It makes sense to have consistent provisions for AHPs and MEPs, because the Department is interpreting the same definitional provisions in both contexts and because many of the same types of groups or associations of employers that sponsor AHPs for their members will also want to sponsor MEPs. Accordingly, and for the sake of regulatory uniformity and simplicity, if a group or association of employers can establish a bona fide AHP under the AHP Rule, the group or association should also be able to establish a MEP under this final rule.

The final 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 potential 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, and a few commenters expressly agreed with the Department, that any relevant nondiscrimination concerns are already addressed in the tax-qualification provisions of the Code or other federal laws.

Although commenters suggested changes to the provisions in paragraph (b) of the Proposed Rule, the final rule adopts the provisions essentially as proposed. In many instances, the rationale for declining a particular suggested change or amendment is the same or substantially similar to the reason the Department declined the same proposed provision in connection with the AHP Rule. After thoughtful consideration, the Department has generally determined that the rationale for declining a particular suggested change or amendment in the AHP context is applicable in the MEP context, unless otherwise specified. Accordingly, the major comments on the proposal and provisions of the final rule are discussed below.

Many commenters who support open MEPs made recommendations to substantially modify or eliminate some or all of the provisions in paragraph (b) of the final rule as a way of achieving an open MEP framework. Those comments are addressed in the aggregate above in section B 2 of this preamble, and in the related RFI published elsewhere in today's

Federal Register

. They are not addressed in this section of the preamble.

a. Purpose of the Association

Paragraph (b)(1)(i) of the Proposed Rule required that a group or association of employers have at least one substantial business purpose unrelated to offering and providing MEP coverage or other employee benefits to its employer members and their employees, even if the primary purpose of the group or association is to offer such coverage to its members. This provision helps ensure that the association is a bona fide association of employers, rather than merely a commercial arrangement or entity marketing retirement benefits and services to customers on a commercial basis. The “primary purpose” provision recognizes that it is perfectly legitimate for associations to form, in part, as a means of achieving the sorts of economies of scale, bargaining power, and administrative expertise that enable them to provide valuable benefits to their members, as long as they also serve another unrelated substantial business purpose. As an additional guidepost, the paragraph specifically provides that the “substantial business purpose” test is satisfied if the group or association would be a viable entity, even in the absence of sponsoring an employee benefit plan.

A number of commenters believe this standard is too lenient. One commenter, who believes this standard may be abused by profit seeking enterprises, recommended a stricter standard providing that the primary purpose of the group or association could not be offering or providing retirement benefits. Other commenters with similar concerns recommended that the final regulation limit eligible groups or associations of employers to groups or associations that are not-for-profit organizations. One individual believes the standard is undefined, lacks meaningful limitations, and is perfunctory, and that it would allow an

association to exist for the sole purpose of plan sponsorship.

It remains the Department's view, however, that requiring a substantial business purpose unrelated to offering employee benefits strikes an appropriate balance. It appropriately separates out the sorts of bona fide associations of employers that Congress intended to cover from solely commercial operations; promotes expanded access to MEPs; and minimizes the danger of abuse. The “substantial purpose” test is not a lenient standard, as reflected by the safe harbor for associations that would be viable even if they did not provide employee benefits. Thus, an entity that exists solely to sponsor a MEP would never qualify under the safe harbor. The importance of this safeguard should not be underestimated. In the Department's experience under ERISA, many (if not most) regulated entities opt to meet the requirements of safe harbor provisions, even if more stringent than other legally defensible approaches, in exchange for the legal certainty that comes from safe harbor compliance.

More importantly, the commenters overlooked the important modifier—“substantial”—in the phrase “substantial business purpose.” For an organization's business purpose other than offering employee benefits to be “substantial,” it must be

of considerable importance

to the group or association.

Perfunctory or

insubstantial

purposes are clearly insufficient to meet the test. The viability safe harbor provides an indication of just how substantial the other purpose must be to meet the rule's terms.

Compare, substantial,

Oxford Dictionary (2019),

https://en.oxforddictionaries.com

(last visited Apr. 24, 2019) (of considerable importance) with,

substantial,

Merriam-Webster (2019)

https://www.merriam-webster.com

(last visited Apr. 24, 2019) (consisting of or relating to substance).

The Department recognizes, however, that it may not always be easy to determine if an association would be viable if it did not offer employee benefits; that associations may serve multiple other purposes; and that the extent to which other purposes support the organization's viability may vary from year to year based on all sorts of internal and external factors. Accordingly, a purpose other than MEP sponsorship does not have to be the lifeline of the organization in order to be “substantial.” It must, however, be of considerable importance to the existence of the organization—not merely “important,” but of “considerable” importance. The Department expects that, in practice, organizations may have numerous other purposes depending on the type and size of the organization.

Ultimately what is “substantial” or “of considerable importance” to a group or association of employers depends on the facts and circumstances of the particular situation, taking into account the particular organization and its stated mission as reflected in its formal organizational structure and by-laws. But in each instance, the “other” business purpose(s) or activity must be substantial enough that the association

could,

under different circumstances, be a viable entity even in the absence of sponsoring a MEP. This is true even if the viability of the association as currently structured depends on offering and providing MEP coverage to its members. For example, if the group or association operated with an active membership before sponsoring a MEP, that would be compelling evidence of such a substantial business purpose, even if its primary purpose in the future becomes offering and providing MEP coverage to its members. The organization's earlier operations demonstrate that the association

could

be viable in the absence of offering and providing MEP coverage, assuming the organization continues its pre-MEP activities.

Importantly, the final rule includes conditions which, when combined with the “substantial business purpose” standard, will protect participants and beneficiaries from the concerns identified by the commenters. These other conditions include the requirement that the functions and activities of the group or association must be controlled by its employer members. For all of the foregoing reasons, paragraph (b)(1)(i) of the Proposed Rule is adopted without change.

Commenters indicated that it may be a common practice for such groups or associations to form wholly owned non-profit corporations for the sole purpose of establishing and maintaining benefit programs for their members. In these circumstances, the group or association has a mechanism to appoint the board of directors of the affiliated corporation from among members of the group or association, according to the commenters. Commenters requested clarification as to whether the substantial business purpose test precludes a group or association of employers from using a wholly owned affiliate to administer a MEP in this manner. They also pointed out that there are prudent business reasons for adopting this type of delivery structure, including that the affiliated corporation can focus exclusively on administering retirement benefits and catering to the specialized needs of plan participants and retirees, while the group or association focuses on promoting and advancing the related, but different business purposes of the group or association. It is not inconsistent with the substantial business purpose test, in the Department's view, if a group or association with a substantial business purpose unrelated to offering and providing MEP coverage or other employee benefits were to create a wholly owned subsidiary to administer a MEP, even if the subsidiary exists solely to administer the MEP. In this circumstance, the group or association's substantial business purpose unrelated to the provision of employee benefits is not affected by its decision to create a subsidiary under its control to administer the MEP. This analysis also assumes that the other requirements of the final rule are satisfied, including the requirement that the group's or association's employer members that participate in the plan control the plan, both in form and substance.

b. Groups or Associations of Individuals

Paragraph (b)(1)(ii) of the Proposed Rule required that each employer member of the group or association participating in the plan be a person acting directly as an employer of at least one employee who is a participant covered under the plan. At least two commenters requested that the final regulation be expanded to cover groups or associations whose members include, not just employers and working owners, but also individuals who are not working owners and whose employers do not participate in the group or association. These commenters assert that membership in associations often includes individuals who are common law employees of employers that are not also members of the association. These associations desire to permit these individuals to enroll in the MEP, according to the commenters. The commenters argued that otherwise, the Proposed Rule unduly limits the ability of these associations to offer MEPs to all of their members, including small employers, independent contractors, and sole proprietors who could otherwise benefit from the final rule's extended coverage of “working owners.” Regardless of the policy merits of these arguments, 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. Thus, the final rule, like ERISA section 3(5), is limited to employers, including working owners, because the Department cannot expand its definition beyond the statute's scope. Accordingly, paragraph (b)(1)(ii) of the Proposed Rule is adopted in the final rule without change.

c. Formal Organizational Structure

Paragraph (b)(1)(iii) of the Proposed Rule required a group or association to have “a formal organizational structure with a governing body” as well as “by-laws or other similar indications of formality” appropriate for the legal form in which the group or association operates in order to qualify as a bona fide group or association. The Department received no comment letters on this provision. Commenters on the mirror provision in the AHP Rule generally supported these provisions on the basis that having such formalities will not only serve to clarify the rights and obligations of members of the group or association, but to promote accountability by enabling regulators and others to readily identify those parties who are responsible for operations, including the establishment and maintenance of the group health plan. These commenters suggested that the existence of formalized and robust organizational structures could be an important form of protection against fraud and insolvency. The Department agrees with the commenters that the requirements of paragraph (b)(1)(iii) promote accountability and provide support against fraud and insolvency. The provision also ensures that the organization is a genuine organization with the organizational structure necessary to act “in the interest” of participating employers with respect to the MEP as the statute requires. For these reasons and to maintain consistency with the AHP Rule, the Department adopts these provisions in this final rule without modification.

d. Participating Employer Control Over the Group or Association

Paragraph (b)(1)(iv) of the Proposed Rule required that member employers control the functions and activities of the group or association, and that the employer members that participate in the plan control the plan. Control must be present both in form and in substance. One commenter recommended that the final rule state that the control test may be satisfied indirectly through the regular nomination and election of directors, officers, or other similar representatives that control such functions and activities. The implicit concern raised by this commenter is that the control test, as proposed, could be construed as requiring that participating employers be responsible for management and day-to-day operations of the group or association and MEP in order for the group or association to qualify as bona fide.

The final rule does not require group or association members to manage the day-to-day affairs of the group or association or the plan in order for the group or association to qualify as bona fide. As has long been the case, the Department will consider all relevant facts and circumstances in determining whether the functions and activities of the group or association are sufficiently controlled by its employer members, and whether the employer members who participate in the group or association's pension plan sufficiently control the group plan. In the Department's view, the following factors, although not exclusive, are particularly relevant for this analysis: (1) Whether employer members regularly nominate and elect directors, officers, trustees, or other similar persons that constitute the governing body or authority of the employer group or association and plan; (2) whether employer members have authority to remove any such director, officer, trustees, or other similar person with or without cause; and (3) whether employer members that participate in the plan have the authority and opportunity to approve or veto decisions or activities which relate to the formation, design, amendment, and termination of the plan, for example, material amendments to the plan, including changes in coverage, benefits, and vesting. The Department ordinarily will consider there to be sufficient control if these three conditions are met.

A number of commenters requested clarification or confirmation that the control test would be satisfied in an array of fact patterns involving different control structures, membership classifications, and participation privileges, including subgroup structures and associations of groups or associations. As stated elsewhere in this preamble, control must be present both in form and in substance, and whether control exists is determined under a facts and circumstances test. The Department declines in this preamble to address the application of the final rule to specific fact patterns. As noted above, the Department has procedures to answer inquiries of individuals or organizations affected, directly or indirectly, by ERISA as to their status under ERISA and as to the effect of certain acts and transactions.

See

ERISA Advisory Opinion Procedure 76-1 (FR Doc. 76-25168).

The same commenter suggested that the final rule could contain a deeming provision under which the control test would be considered satisfied if, in the absence of actual control, it could be demonstrated that the group or association otherwise acts in the interest of its employer-members in relation to such a plan, including but not limited to demonstrating the existence of a fiduciary or contractual duty to act in the plan's interest. Whether group or association members in fact have sufficient control of the functions and activities of the group or association for it to be considered bona fide, however, is entirely independent of and unrelated to whether the group or association's key officials or board members are fiduciaries of the MEP. For these reasons, the Department declines to adopt the suggestions of these commenters.

e. Commonality of Interest

Paragraph (b)(1)(v) of the Proposed Rule required that the employer members of the group or association of employers have commonality of interest. Paragraph (b)(2)(i)(A) of the Proposed Rule recognized commonality if the employers are in the same trade, industry, line of business or profession. Alternatively, paragraph (b)(2)(i)(B) of the Proposed Rule recognized commonality if each employer has a principal place of business in the same region that does not exceed the boundaries of a single State or a metropolitan area (even if the metropolitan area includes more than one State).

(i) Commonality Based on Size

Commenters suggested the final rule should contain a new provision that finds sufficient commonality based on the “small” size of the participating employers, regardless of the small firms' type of business or location. Some of these commenters would include in this category businesses with no employees other than the owner. According to the commenters, small employers often share unique bonds, interests, needs, and regulatory schemes, and may have significantly more commonality of interest than those in the same industry or region due solely to their size.

The Department does not agree that this characteristic should be included as additional commonality of interest criteria in the final rule. A test that would treat all small businesses—including sole proprietors/working owners—nationwide as satisfying the standard based on size alone—without regard to their products, services, lines of business, or location—would be too open-ended to establish the requisite commonality of interest. Moreover, to the extent this class of business is not part of a single trade, industry, line of

business, or profession, the geography standard for establishing a commonality of interest at paragraph (b)(2)(i)(B) of the final rule already provides this class of business with the ability to form State-wide and metropolitan area groups and associations that qualify as an employer for purposes of sponsoring a MEP. Accordingly, this suggestion was not adopted. Commenters on the RFI, however, are invited to include additional comments on this topic in the context of open MEPs.

(ii) Commonality Based on Industry

Paragraph (b)(2)(i)(A) of the Proposed Rule recognized commonality if the employers are in the same trade, industry, line of business, or profession. This reflects that employers in the same trade or industry, not only produce the same or similar products or services, but that they also tend to share, among other things, similar regulatory and market environments, economic trends, collective bargaining, and other similar business challenges that in turn may bear on the provision of benefits to their employees. Because of these shared traits, employers in the same trade or industry routinely associate in various industry or trade groups, and have done so historically. One commenter on the AHP Rule, for example, reported a membership of more than 7,000 trade associations. This commenter, which is an association of associations, stated that there is an organization or association for every industry and profession in the United States, and that over 60,000 are organized under Code section 501(c)(6) as trade associations and business leagues. As of 2017, the Internal Revenue Service recognized more than 63,000 Code section 501(c)(6) trade and professional associations.

Internal Revenue Service Data Book, 2017, p. 57, Publication 55B Washington, DC (March 2018) (

https://www.irs.gov/pub/irs-soi/17databk.pdf

Commenters requested that the Department clarify whether businesses that support a particular industry, or that are allied with a particular industry, are considered to be “in the same industry” as that term is used in paragraph (b)(2)(i)(A) of the Proposed Rule. For example, one commenter notes that an association of home builders that includes builders and developers might also include a wide variety of professionals, artisans, and tradespeople, such as plumbers, carpenters, and electricians, who support the home building and development industry. In addition, another commenter notes that an association of owners and operators of vending machine companies might also include vending machine manufacturers and vending machine suppliers, who support and are allied with the owners and operators of the vending machine companies. These commenters request clarification so that persons interested in forming MEPs would have more certainty regarding the permissible scope and membership classifications that would satisfy the final rule.

Determinations of what is a “trade,” “industry,” “line of business,” or “profession,” as well as whether an employer fits into one or more these categories, are based on all the relevant facts and circumstances. In general, the Department intends for these terms to be construed broadly to expand employer and employee access to MEPs. Absent future guidance to the contrary, the Department ordinarily will not challenge any reasonable and good faith industry classification or categorization adopted by the group or association of employers. Nor will the Department challenge the inclusion of “support” or “allied” businesses as members of the group or association if they share a genuine economic or representational interest with the other members. The Department declines in the preamble to address the application of the final rule to specific fact patterns. The Department has procedures to answer inquires of individuals or organizations affected, directly or indirectly, by ERISA as to their status under ERISA and as to the effect of certain acts and transactions. See ERISA Advisory Opinion Procedure 76-1 (FR Doc. 76-25168).

(iii) Commonality Based on Geography

Paragraph (b)(2)(i)(B) of the Proposed Rule contained a geography test. It recognized commonality if each employer has a principal place of business in the same region that does not exceed the boundaries of a single State or a metropolitan area (even if the metropolitan area includes more than one State).

Commenters recommended broadening the geography test in two different ways. Some commenters recommended expanding the geography test to allow regional commonality, rather than the state-based approach taken in the Proposed Rule. For this purpose, these commenters recommended using the regional divisions used by the U.S. Census Bureau, the districts used by the Federal Reserve, or the regions used by the Bureau of Economic Analysis. Alternatively, some commenters recommended expanding the geography test so that a MEP for employers in a metropolitan area that crosses two or more states would not need to exclude employers in those states that are located outside the metropolitan area. The first recommendation would foster large regional MEPs, potentially increasing economies of scale compared to state-based MEPs. The second recommendation would help employers in suburban and rural areas of states that may not have access to a statewide MEP. Because of the similarities between these recommendations and other ideas being explored in the RFI on open MEPs published elsewhere in today's

Federal Register

, the Department defers action on these recommendations. These recommendations provide a wide variety of other ways the Department could draw these lines, and the Department believes these issues would benefit from an additional opportunity for public comment. Accordingly, the Department includes a comment solicitation in the RFI on group or association MEPs covering larger geographic regions to ensure a fully developed public record before considering or taking any further action.

Some commenters opposed the geography test due to its breadth. These commenters argued that this test in effect establishes fictional commonality among employers, because it is based on the simple fact that their businesses reside in the same state, regardless of the state's size or population. To these commenters, shared geography alone is not an indicator of commonality of business or economic interests among a state's inhabitants and should not be considered a sufficient nexus to establish commonality. These commenters fear that geography-based commonality will lead to the establishment of large MEPs by state or even regional associations with large numbers of participating members that have virtually nothing in common other than location and no meaningful industry, professional, or business ties. The commenters expressed concern that the geography test will enable and result in the establishment of purely commercial arrangements by promoters with only pecuniary interests in participating members and participating members with only tenuous and remote connections and ties among themselves, all of which ultimately could result in an increase in arrangements that are susceptible to financial mismanagement, insolvency, and lack of fiduciary oversight. These commenters, therefore, recommended eliminating the geography test.

The Department does not agree with these commenters that geography alone has no binding or cohesive impact on businesses. It seems plain that employers in the same geography share

common interests concerning employees' education and workforce development, taxation, transportation and commuting networks, the legal and regulatory environment, human capital pool, physical environment, local and state economic development partnerships, collective bargaining, and myriad other regional business trends and issues. That geography is a natural basis around which businesses organize themselves is evident in the number of state and local chambers of commerce in the United States, and their enrollment. There are roughly 4,000 chambers of commerce in the United States.

The territorial nature of these organizations speaks directly to the correlation between geography and common interests.

According to the Association of Chamber of Commerce Executives (

https://secure.acce.org/about/chambers-of-commerce/

Nor does the Department agree that it makes sense to eliminate the geography test. A primary purpose of the geography test is to make it easier for employers to band together and collectively benefit from the economies of scale that come from aggregation. Eliminating the geography test would undermine this intended benefit. Moreover, the geography test in the final rule also aligns with the geography test in the AHP Rule, thus making it possible for statewide groups and associations to better serve their members by offering access to both health and retirement benefits. Consequently, eliminating the geography test would undermine that member service opportunity as well.

Nor does the Department agree that narrowing the geography test is necessary to guard against fraud and abuse. The final regulation contains numerous safeguards to prevent large aggregations of completely unrelated employers in MEPs and potential mismanagement and fraud. The final rule, for example, prohibits financial services firms from being the group or association that establishes the MEP, requires that functions of the group or association be controlled by employer members, requires the group or association to have a substantial business purpose other than providing benefits, and makes clear that the parties administering the MEP must fully adhere to ERISA's fiduciary standards. These provisions adequately guard against the concerns raised by the commenters, and ensure that the group or association will represent the common interests of its employer members.

One commenter noted that the Seventh Circuit invalidated a geography-based condition for “voluntary employees' beneficiary associations” (VEBAs) described in section 501(c)(9) of the Code.

While the commenter described that decision as applying in an analogous context, section 3(5) of ERISA and section 501(c)(9) of the Code have different language and purposes. In addition, the Department of Treasury and the IRS, rather than the Department of Labor, have jurisdiction over section 501(c)(9) of the Code.

Water Quality Association Employees' Benefit Corporation

United States,

795 F.2d 1303 (7th Cir. 1986).

In response to the

Water Quality

decision, the Internal Revenue Service issued a proposed regulation at 26 CFR 1.501(c)(9)-2, which sets forth a modified geographic limitation.

(iv) Commonality Provisions In General

Other commenters generally opposed the commonality provisions (whether based on geography or industry) because they are not expressly set forth in the statute. These commenters recommended eliminating the commonality provisions entirely, and focusing instead only on whether the group or association acts “indirectly in the interest” of an employer in relation to the MEP, without regard to any requirement of a common economic or representational nexus. While these commenters' arguments are not without force, the Department has decided for policy reasons not to simply eliminate these provisions.

Even assuming that criteria other than commonality could satisfy section 3(5), the commonality provisions serve important policy goals in this context. First, keeping them in this final rule for MEPs establishes uniformity with the AHP Rule, thereby promoting consistent outcomes for employer-groups interested in sponsoring both health and retirement plans for their employees. Second, since employer groups often form on geographic and industry lines, the commonality provisions should be simple and natural to implement. Third, replacing the commonality provisions with looser or tighter criteria would likely require recalibration of the other conditions in paragraph (b) the final rule, all of which are designed to work in tandem with the commonality provisions. The more lenient test recommended by these commenters, for example, would require the Department to reevaluate and potentially expand the regulatory safeguards for MEPs, possibly to include new and potentially sophisticated and extensive compliance and enforcement mechanisms. This would be especially true in the case of open MEPs sponsored by financial institutions. Before proceeding with a less restrictive test (

e.g.,

open MEPs), which is a much larger step, the Department intends to evaluate the responses to the RFI on open MEPs published elsewhere in today's

Federal Register

These policy objectives more than adequately justify the commonality provisions in this final rule. Similar—albeit more restrictive—commonality provisions were present in decades of subregulatory guidance preceding and effectively superseded by this final rule. The prior subregulatory guidance, which was issued to address the ambiguity in section 3(5) of ERISA, used the commonality provisions essentially to help draw a line between commercial arrangements and associations that serve employers' interests. But commonality provisions—whether in the narrower form as they existed in the subregulatory guidance or in the expanded form as they exist in this final rule—are not directly in or necessarily compelled by the statute. And their long-term use in the prior subregulatory guidance in no way restricts the Department's ability now to modify them or even replace them altogether with different criteria. As a case in point, no commonality provisions in any form are present in the portion of this final rule governing bona fide PEOs because there the Department chose other criteria that adequately demonstrate when a “person” is able to adequately act in the employers' interests in relation to a MEP. And, furthermore, unlike the prior subregulatory guidance, the final rule's more expansive commonality provisions are the product of extensive notice and comment rulemaking, in which the Department considered many factors and provides herein ample justification for its decisions. In the end, the regulatory process of addressing the ambiguity in section 3(5) of ERISA invariably required some measure of policy-making and line drawing, and the lines in this final rule reflect the reasoned policy judgment of the Department.

f. Provision Relating to Financial Services Firms

Paragraph (b)(1)(vii) of the Proposal Rule generally prohibited an employer group or association from being a bank, trust company, insurance issuer, broker-dealer, or other similar financial services firm (including a pension record keeper or a third-party administrator) and from being owned or controlled by such a financial services

firm. Nearly every commenter in favor of open MEPs opposed this prohibition. Their recommendation to remove this prohibition, when combined with their recommendations on other provisions, would achieve their favored outcome. Other commenters, however, supported this provision. Their support is based on the premise that, unlike traditional groups or associations of employers such as chambers of commerce or business leagues, which exist to serve and advance the needs of their participating members, financial services firms exist primarily to serve and advance the business interests of the company or concern, including its shareholders or other owners. Several of these commenters argued that financial services firms should not be in the business of providing MEPs because of conflicts of interest.

This provision is consistent with the AHP Rule, which in relevant part, prohibits health-insurance companies from being treated as a bona fide group or association. In that context, the Department concluded that 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. 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 final rule therefore applies a similar approach to employer groups or associations sponsoring MEPs in the final rule. The Department may revisit this issue depending on future action, if any, taken in response to the RFI on open MEPs published elsewhere in today's

Federal Register

4. Bona Fide PEOs

Although a number of commenters discussed the bona fide PEO provisions in the Proposed Rule, only a few comment letters actually addressed the substance of these provisions. Many commenters favoring open MEPs, for instance, raised the general concern that PEOs appeared to be given preferential treatment under the Proposed Rule. This observation came mainly from representatives of financial services firms, such as banks, insurance companies, and brokerage firms, who favor an open MEP structure. The Department does not agree that PEOs have been singled out for preferential treatment under the final rule. Rather, to the extent that PEOs stand in the shoes of their client employers for certain purposes and perform substantial employment functions on their client's behalf, the final rule merely recognizes that such PEOs are acting “indirectly in the interest of [their client] employers” under ERISA section 3(5) for purposes of sponsoring a MEP. Nevertheless, in response to these comments, as announced earlier in this document, elsewhere in today's

Federal Register

the Department published a RFI soliciting comments on a broad range of issues relating to open MEPs for possible future rulemaking. The RFI will give these commenters an opportunity to provide additional comments on possible extensions of the final rule. The substantive comments received in response to the Proposed Rule are addressed below in relation to the relevant provisions of the final rule.

a. The Four General Requirements

Paragraph (c) of the Proposed Regulation included four requirements 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. The final rule adopts these four requirements essentially as proposed. Paragraph (c)(1)(i) requires the PEO to perform substantial employment functions on behalf of the client employers. Paragraph (c)(1)(ii) requires the PEO to have substantial control over the functions and activities of the MEP, as the plan sponsor, the plan administrator, and a named fiduciary. Paragraph (c)(1)(iii) requires 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) requires the PEO to 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.

Regarding paragraph (c)(1)(i), a PEO's assumption and performance of substantial employment functions on behalf of its client-employers is one of the lynchpins of the final rule. Just as commonality and control help to establish the appropriate nexus for groups or associations of employers under paragraph (b) of the final rule, the PEO's performance of substantial 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 final rule 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).

Importantly, a PEO's status under the final rule does not make the PEO more or less likely to have an employment relationship (whether referred to as joint employment or otherwise) with the client-employer, for purposes of other laws or liabilities. What constitutes 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 or Fair Labor Standards Act, and neither supports nor prohibits a finding of an employment relationship in other contexts. The Department received a number of responses to its solicitation for comments on this issue. A number of commenters requested that the Department reiterate that participation in a MEP does not necessarily create a joint employment relationship by including language regarding joint employment in the operative text of the final rule. Another commenter asked that the Department state that MEP participation cannot be used as evidence of employee status for purposes of evaluating in any proceeding whether an individual is providing services as an independent contractor or employee. Although the Department recognizes the concern of commenters that participation in a MEP might create an inference under other laws, the Department's authority in issuing this final rule is limited to its interpretation of ERISA. Consequently, the operative text of the final rule, like the NPRM, does not contain a specific reference to the existence of a joint employment relationship under other laws.

Regarding paragraph (c)(1)(ii), 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 reference in ERISA

section 3(5) to a person acting as the employer “in relation to the plan.” Paragraph (c)(1)(ii) of the final rule requires 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 ERISA), the plan administrator (within the meaning of section 3(16)(A) of ERISA), and a named fiduciary (within the meaning of section 402 of ERISA). Looking to the PEO's substantial control of the MEP, as the sponsor, administrator, and fiduciary, is sensible given the “in relation to the plan” language of section 3(5) of ERISA. In response to comments, the final rule clarifies that because the PEO assumes these important statutory roles under ERISA, the PEO continues to have employee-benefit plan obligations to the employees of a client employer, as plan participants, even after that client employer no longer contracts with the PEO. The obligations of the PEO as the plan administrator and as a named fiduciary to the MEP's participants and beneficiaries does not terminate with the conclusion of a client contract between the PEO and the client employer; instead, these obligations continue until participants are no longer covered by the plan and beneficiaries are no longer receiving benefits (

e.g.,

the individuals have received a lump-sum distribution or a series of distributions of cash or other property which represents the balance of his or her credit under the plan, or a plan-to-plan transfer has occurred). As with pension plans in general, distributions are governed by the terms of the MEP as are plan-to-plan transfers.

b. Substantial Employment Functions Safe Harbor

Whether a PEO satisfies the requirement, in paragraph (c)(1)(i), to perform substantial employment functions on behalf of its client employers is generally determined based on the facts and circumstances of the particular situation. This approach gives PEOs maximum flexibility to structure their affairs and recognizes that all PEOs do not necessarily follow the same business model or provide the exact same services to client employers. It also provides PEOs room for innovations in their business models and service packages in the future. At the same time, however, the Department understands that some entities may prefer more regulatory certainty in ordering their business affairs than comes from a facts-and-circumstances test. For this reason, the final rule contains a regulatory safe harbor separate from this facts-and-circumstances test.

The safe harbor is contained in paragraph (c)(2) of the final rule and differs from the safe harbor structure in the Proposed Rule. The Proposed Rule contained two safe harbors, one for CPEOs within the meaning of Code section 7705, and another for PEOs that are not CPEOs (non-CPEOs). The change in structure stems from commenters who raised concerns regarding both the number and type of criteria required under the Proposed Rule. The commenters stated that the Proposed Rule's list of nine criteria for non-CPEOs were, depending on the particular criterion, unnecessary, unrealistic, not entirely consistent with industry practice, not exactly reflective of how PEOs and their clients share employer functions, misaligned with many state licensing requirements, or out of step with the advisory role of PEOs. Without significant adjustments to this safe harbor, including eliminating at least two of the Proposed Rule's nine criteria, the commenters asserted that many non-CPEOs would not qualify for the safe harbor. The commenters recommended adding a criterion that the PEO be licensed and registered in accordance with state law. With respect to the Proposed Rule's CPEO safe harbor, the commenters essentially argued that the Proposed Rule required PEOs to satisfy too many employment-function criteria and that CPEO status alone should be sufficient, assuming the service contract between the client and the CPEO meets the requirements in the Code. One person asked for clarification on what would happen under the safe harbor if a CPEO temporarily lost its certification, and therefore its CPEO status, under the Code for minor infractions, procedural missteps, or reasons having nothing to do with substantive performance of employment functions on behalf of client employers. One commenter argued that the standards should be the same for both CPEOs and non-CPEOs, and not more or less favorable to one business model over the other. This commenter viewed the Proposed Rule as favoring CPEOs.

In response to these comments, the Department streamlined the Proposed Rule's safe harbor structure in the final rule. Unlike the Proposed Rule, which contained one safe harbor for PEOs that are CPEOs and a second safe harbor for PEOs that are non-CPEOs, the final rule contains only one safe harbor for all PEOs regardless of their status under the Code's CPEO provisions. There may be sound business reasons behind a PEO's decision to be a CPEO or not, and there may be equally sound business reasons behind a client employer's decision to choose or not choose a CPEO. Nevertheless, the status of a PEO under the Code's CPEO provisions is irrelevant to satisfying the safe harbor in the final rule; the relevant focus is the extent to which the PEO actually performs substantial employment functions on behalf of its client employers. The Department determined that the complexity of the Proposed Rule's safe harbor could be reduced by reducing and combining the essential elements of the Proposed Rule's two separate safe harbors into a single safe harbor that both CPEOs and non-CPEOs may rely on in connection with ERISA section 3(5). The Department reiterates that this is a safe harbor, intended to provide regulatory certainty. It is possible that a PEO could satisfy the statute's general facts and circumstances test, even if it does not satisfy the safe harbor.

Instead of nine criteria, the new safe harbor contains only four criteria, and instead of allowing the PEO the choice of selecting five from among the nine criteria, the new safe harbor requires that the PEO satisfy all four criteria. The four criteria selected were drawn from the types of services and functions PEOs routinely provide to clients, and with reference to, but not dependent on, the CPEO statutory standards. After carefully reviewing the public comments, the Department selected the four criteria that the commenters indicated are central to all PEO client contracts and that, in the Department's view, clearly show the PEO acts indirectly in the interest of the client-employer under ERISA section 3(5), in such a way and to such an extent that it sets the PEO apart from a mere service provider.

The new safe harbor provides that a PEO will be considered to perform substantial employment functions on behalf of its client employers under the following circumstances: First, the PEO assumes responsibility for and pays wages to employees of its client-employers that adopt the MEP, without regard to the receipt or adequacy of payment from those client employers. Second, the PEO assumes responsibility to pay and perform reporting and withholding for all applicable federal employment taxes for its client employers that adopt the MEP, without regard to the receipt or adequacy of payment from those client employers. Third, the PEO plays a definite and contractually specified role in recruiting, hiring, and firing workers of its client-employers that adopt the MEP, in addition to the client-employer's responsibility for recruiting, hiring, and firing workers. As explained below, a

PEO is considered to satisfy this standard if it recruits, hires, and fires, assumes responsibility for recruiting, hiring, and firing, or retains the right to recruit, hire, and fire workers of its client-employers that adopt the MEP, in addition to the client-employer's responsibility for recruiting, hiring, and firing workers. Fourth, the PEO assumes responsibility for and has substantial control over the functions and activities of any employee benefits which the client contract with a client employer may require the PEO to provide, without regard to the receipt or adequacy of payment from those client employers for such benefits. All four of these criteria must be satisfied to meet the safe harbor.

The Proposed Rule contained language providing that, depending on the facts and circumstances of the particular situation, even one of the safe harbor criteria alone may be sufficient to satisfy the general requirement that a PEO perform substantial employment functions on behalf of its client employers. The final rule does not include that language. The Department's view is that it is not appropriate to state that any single safe harbor criterion alone can be relied upon to satisfy the general requirement that a PEO perform substantial employment functions on behalf of its client employers—all four safe harbor criteria are necessary given the broad scope of activity encompassed by the new safe harbor test and the nature of the four remaining safe harbor criteria.

With respect to the third criteria, the first sentence of paragraph (c)(2)(iii) of the final rule requires that the PEO have a definite and contractually specified role in recruiting, hiring, and firing workers of its client-employers that adopt the MEP, in addition to the client-employer's responsibility for recruiting, hiring, and firing workers. This sentence recognizes that PEOs and their client- employers share responsibilities and can also individually retain responsibilities. For example, a PEO client contract may provide that the client-employer shall recruit, hire, and fire based on the needs of the business, but allocate certain termination responsibilities to the PEO, such as in the event a worksite employee engages in employment discrimination that violates Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967, or the Americans with Disabilities Act of 1990. This sentence also recognizes that PEOs commonly have a role, for payroll and other human resource purposes, in hiring and firing workers of client-employers, but client-employers determine who works at their worksites and under what conditions, as necessary to conduct their business.

The second sentence of paragraph (c)(2)(iii) of the final rule goes on to explain that the requirement to have a “definite and contractually specified role” in the first sentence would be satisfied if, pursuant to the contract, the PEO recruits, hires, and fires; assumes the responsibility for recruiting, hiring, and firing; or retains the right to recruit, hire, or fire workers of its client-employers that adopt the MEP. This text does not necessarily require that PEOs actually interview and select the employees of client employers in the traditional common-law sense, in which a business hires employee based on the skillset and needs of the particular business, but it does require that PEOs, at a minimum, retain a right or obligation under contract to recruit, hire, and fire as necessary to fulfill the PEO's responsibilities under the contract and applicable state law. For example, a PEO client contract may provide that following the client-employer's initial decision to hire an employee, that hiring decision does not become official until the PEO approves or ratifies the selection and finishes the administrative on-boarding process. Similarly, a PEO client contract may provide that client employer may not terminate a worksite employee until the PEO validates or approves the termination. The intent of paragraph (c)(2)(iii) is to accommodate the broad range of human resource services provided by and across the various PEO models, but at the same time to require a definite and contractually specified role for the PEO in the shared recruiting, hiring, and firing processes.

c. PEOs and Working Owners

As discussed below in section 5 (d) of this preamble, the final rule—like the Proposed Rule—does not extend the working-owner provisions to bona fide PEOs.

d. PEOs and Health Plans

Some stakeholders inquired whether a “bona fide professional employer organization” that is authorized under the final rule to sponsor a MEP for the employees of its client employers also would be able to establish and maintain a single plan, fund, or program of healthcare benefits for these same individuals. These stakeholders observed that the definition in section 3(5) of ERISA does not differentiate as to the type of benefit plan that an employer who meets the 3(5) definition may establish or maintain. Consequently, these stakeholders maintain, if a PEO meets the conditions to be an employer for purposes of sponsoring a single pension plan, the PEO also should be able to rely on that status to sponsor a single group health plan. The stakeholders also argued that the same or similar policy reasons that support expanded access to retirement plan options for small employers also support expanded access to healthcare options for these same employers. Section 3(5) of ERISA, in relevant part, provides that the term “employer” means any “person” acting indirectly in the interests of an employer, in relation to “an employee benefit plan.” Although the statute is neutral on its face as to the type of employee benefit plan being established or maintained by the “person,” the final rule does not address when a PEO may be able to act as an employer for establishing or maintaining a single group health plan to cover the employees of the PEO's client employers. Evidence suggests that some PEOs already offer health plans to the employees of their client employers and that this number could increase.

But, as many commenters noted, health plan sponsorship may raise different issues and require different regulatory conditions than retirement plans.

The topic of health plans is beyond the scope of this rulemaking project. The Proposed Rule did not address the topic of health plans in a meaningful way, or provide the opportunity for the public to provide comments. Accordingly, the PEO provisions in the final rule remain limited to defined contribution retirement plans. Until the Department takes additional regulatory or other action, a PEO interested in sponsoring a health arrangement for its client

employers must look to the terms of the statute.

See “

2015 Employer Health Benefits Survey,“ Section Fourteen: Employer Opinions and Health Plan Practices, Kaiser Family Foundation,

September 2015, available at

https://www.kff.org/report-section/ehbs-2015-section-one-cost-of-health-insurance/.

(Five percent of firms with 3 to 499 workers offering health benefits through a PEO (Exhibit 14.8). Six percent of covered workers enrolled in health benefits at firms with 3 to 499 workers are enrolled in a plan offered through a PEO. The uptake was greatest for firms that had 10-49 workers, with 8% of those firma offering health benefits through a PEO.

As described above, the Department recognizes the importance of expanding access to affordable group health care coverage to small employers and accordingly, published a final rule on Association Health Plans that permits a bona fide group or association of employers to establish a single group health plan for the employer members' employees; and sets out specific requirements that such group or association must meet in order to be a 3(5) employer. 83 FR 28912 (June 21, 2018). One such requirement that is unique in the health plan context is that group health plan must not discriminate against employees in premiums, eligibility or benefits based on a health factor.

5. Working Owner Provision

a. In General

Paragraph (d) of the Proposed Rule expressly provided 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. 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. This provision in the Proposed Rule is the same as the working-owner provision in the AHP Rule.

Paragraph (d) of the Proposed Rule was limited to MEPs established and maintained by bona fide groups or associations of employers, and did not extend to MEPs established and maintained by PEOs. The public commenters supported this provision, which is adopted as proposed.

83 FR at 28964. In

State of New York

United States Department of Labor,

363 F. Supp. 3d 109 (D.D.C. March 28, 2019), the District Court vacated portions of the Department's final rule on AHPs, including the working-owner provisions at 29 CFR 2510.3-5(e). The Department disagrees with the District Court's ruling and an appeal has been filed.

Nothing in the final rule should be read to indicate that a business that contracts with individuals as independent contractors becomes the employer of the independent contractors merely by participating in the MEP with those independent contractors who participate as working owners, or by promoting participation in a MEP by those independent contractors, as working owners.

b. Hours-Worked Provision

Paragraph (d)(2) of the Proposed Rule included an “hours worked” provision that contained three essential requirements. First, the term “working owner” means any person who a responsible plan fiduciary reasonably determines is an individual who has an ownership right of any nature in a trade or business, whether incorporated or unincorporated, including a partner or other self-employed individual. Second, this person also must earn wages or self-employment income from the trade or business for providing personal services to the trade or business. Third, this person must work “on average at least 20 hours per week or at least 80 hours per month providing personal services to the working owner's trade or business.”

At least one commenter requested clarification on how to apply the hours-worked provision to workers that do not have a defined work schedule that results in a steady and predictable 20-hour work week or 80-hour month. The precise issue in need of clarification for this commenter is whether plan fiduciaries are permitted to use two-year averages when determining if working owners meet the minimum-hours-worked requirement. According to this commenter, many workers in the construction industry have variable employment, which is dependent on the economy, weather, and other business and market factors. Working owners facing these predicaments may encounter periods of high demand for their services, during which they work greatly in excess of 80 hours per month, followed by periods of sustained low demand, during which they work significantly less than 20 hours per week.

While the Department in this document does not render an opinion on the categorical appropriateness of using two-year averages, the final rule expressly permits the use of averaging by plan fiduciaries to determine whether working owners satisfy the hours-worked provision in the final rule. The Department adopted averaging language in the AHP Rule in order to accommodate these “variable workers” in that context, and today imports that same language into this final rule. Thus, this final rule too allows flexibility in making an hours-worked determination to address situations in which a working owner's time performing services for his business varies due to various industry, seasonal, and other business and market factors. A working owner could demonstrate this by evidence of a work history or a reasonable projection of expected self-employment hours worked in a trade or business. While the final rule contains minimum weekly or monthly hours-worked requirements, it does not contain a maximum reference period over which averaging of hours is permitted or required. Since many of ERISA's and the Code's pension benefit provisions require annual recordkeeping and attention, many MEPs may decide to adopt annual or 12-month periods for averaging purposes out of administrative efficiency, although others may not. Ultimately, whether any particular maximum reference period is appropriate, however, is a matter within the discretion of the plan fiduciary taking into account the plan document and facts and circumstances of the particular situation. The exercise of this discretion by the plan is subject to the general fiduciary requirements of section 404(a) of ERISA. Accordingly, the final rule adopts paragraph (d)(2)(iii) of the Proposed Rule without change.

c. Wages or Self-Employment Income

Paragraph (d)(2) of the Proposed Rule included an “earned income” alternative to the “hours worked” provision. Under the earned-income alternative, the working-owner must have “wages or self-employment income from such trade or business that at least equals the working owner's cost of coverage for participation by the working owner and any covered beneficiaries in any group health plan sponsored by the group or association in which the individual is participating or is eligible to participate.” For this purpose, 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.

Several commenters were confused by the earned-income provision. Some thought it was unnecessary in light of the hours-worked provision. These commenters apparently understood the earned-income provision to be a requirement in addition to the hours-worked condition, and not an alternative. Other commenters did not understand the connection between health care premiums or cost of coverage and participation in a MEP. The commenters recommended eliminating this provision because they either thought the provision was a mistake or saw no need for it.

The earned-income provision is an alternative to the hours-worked provision. These two separate provisions are disjunctive conditions, not conjunctive requirements. Thus, working owners may choose whichever test is more appropriate for their circumstances. Further, this provision offers administrative ease and convenience to the administrator of the MEP. This is because the Department expects many groups or associations of employers to offer to their members both AHPs and MEPs and, 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 an employee for participating in a MEP. In finalizing the AHP Rule, the Department concluded that using the cost of coverage of benefits under the AHP was a meaningful metric to ensure that the working owner has a legitimate trade or business, keeping in mind that ERISA governs benefits provided in the context of a work relationship as opposed to the mere marketing of insurance to

individuals unrelated to their status as employees in a trade or business and any benefits they obtain through that status. 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, making reference to the cost of healthcare coverage a proxy in those cases where the group or association has such a plan. For these reasons, the earned-income provision was not eliminated.

Section 401(c) of the Code provides rules for when a self-employed individual may participate in a qualified retirement plan. The Department solicited comments on whether there might be circumstances under which a “working owner” as defined in paragraph (d)(2) of the Proposed Rule might nonetheless fail to be described in section 401(c) of the Code, and if so whether the two provisions could and should be directly aligned. Comments were specifically requested on whether the final rule should limit the definition in paragraph (d)(2) to self-employed individuals described in section 401(c) of the Code to avoid such failures. The Department received no comments indicating a need for or in support of such a limitation. One commenter opposed such a change. This commenter was concerned about the complexity associated with making determinations under section 401(c) of the Code and imposing such an obligation on plan fiduciaries of MEPs. In light of this comment, no changes in this regard were made to the final rule. However, the Department of the Treasury has advised that the inclusion of an individual who is not a common law employee or treated as an employee under section 401(c) would affect the qualified status of the plan. Also, they advised that a plan covering an owner-employee is qualified only if it limits contributions with respect to the owner-employee in accordance with section 401(d) of the Code.

d. Extending Working Owner Provision to PEOs

The final rule does not extend the working-owner provision to MEPs sponsored by PEOs under paragraph (c). Thus, a working owner's trade or business must have at least one common law employee to participate in a PEO's MEP under paragraph (c) of the final regulation. The Department understands that working owners without employees generally would not have a 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 business need for a relationship with a PEO. Accordingly, the working-owner provision of the final rule only applies for purposes of participation in MEPs sponsored by a bona fide group or association.

One commenter, however, indicated there may be circumstances in which a working owner without common law employees has a genuine need to be in a PEO's MEP. This occurs 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, according to the commenter. The Department declines to expand the working-owner provision in paragraph (d) for this situation. In this situation, the working owner is still a participant covered under the plan with respect to his individual account balance because he is or may be eligible to receive a benefit, without regard to whether the working-owner continues his contract with the PEO. This status continues until the working-owner-participant is no longer covered by the plan (

e.g.,

receives a lump-sum distribution or a series of distributions of cash or other property which represents the balance of his or her credit under the plan, or a plan-to-plan transfer has occurred).

Thus, the working owner in this situation is treated the same as a former employee of a client employer that has an ongoing contract. The clause “employees and former employees of former client employers who became participants during the contract period between the PEO and former client employers” was added to paragraph (c)(1)(iv) of the final rule to make this point clear.

29 CFR 2510.3-3(d)(2)(ii).

6. Miscellaneous Topics

a. ERISA Fiduciary Status and Responsibilities of Sponsor and Participating Employers

The Department received multiple comments on the application of ERISA's fiduciary rules to bona fide groups and associations, PEOs, and participating employers. Several commenters, for instance, asked the Department to provide guidance on fiduciary liabilities and responsibilities of a bona fide group or association or PEO that sponsors a MEP and clarify that any individual charged with the operation or management of a MEP is considered a fiduciary under ERISA. These commenters stressed that it is important for groups and associations and PEOs that sponsor a MEP to understand that they are obligated to protect the interests of the participants of the plan, and may be held individually liable if they fail to do so. Other commenters, by contrast, focused on participating or client employers; these commenters requested clarification of a participating or client employer's duty to prudently select and monitor the MEP in which the employer's employees participate.

A MEP offered by a bona fide group or association, or by a PEO, under the final rule is subject to all of the provisions under title I of ERISA applicable to employee pension benefit plans, including the fiduciary responsibility and prohibited transaction provisions in part 4 of ERISA. Bona fide groups or associations and PEOs that sponsor a MEP assume and retain responsibility for operating and administering the MEP, including ensuring compliance with these requirements.

As an operational matter, the MEP's sponsor—and not the participating employers—would generally be designated as the plan administrator responsible for compliance with the requirements of title I of ERISA, including reporting, disclosure, and fiduciary obligations. Under this structure, 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. Although participating employers would retain fiduciary responsibility for choosing and monitoring the arrangement and forwarding required contributions to the MEP, a participating employer could keep more of its day-to-day focus on managing its business, rather than on its plan.

In the MEP context, although a participating employer would no longer have the day-to-day responsibilities of plan administration, the business owner would still need to prudently select and monitor the MEP sponsor and get periodic reports on the fiduciaries' management and administration of the MEP, consistent with prior Department guidance on MEPs.

Association Health Plan Final Rule, 83 FR 28912, 28937 (June 21, 2018).

Association Retirement Plans and Other Multiple-Employer Plans Proposed Rule, 83 FR 53534, 53535 (October 23, 2018).

29 CFR 2509.2015-02, Interpretive Bulletin Relating to State Savings Programs that Sponsor or Facilitate Plans Covered by the Employee Retirement Income Security Act of 1974 (“As a state-sponsored multiple employer plan (“state MEP”), this type of arrangement could also reduce overall administrative costs for participating employers in large part because the Department would consider this arrangement as a single ERISA plan. Under a state MEP, each employer that chose

to participate would not be considered to have established its own ERISA plan, and the state could design its defined contribution MEP so that the participating employers could have limited fiduciary responsibilities (the duty to prudently select the arrangement and to monitor its operation would continue to apply). The continuing involvement by participating employers in the ongoing operation and administration of a 401(k)-type individual account MEP, however, generally could be limited to enrolling employees in the state plan and forwarding voluntary employee and employer contributions to the plan.”).

One commenter suggested that the Department should establish a “fiduciary checklist” to assist small employers in discharging their selection and monitoring duties. According to this commenter, the checklist could encourage or require employers to: (1) Consider at least three plans; (2) examine how long the plan has been in existence; (3) review how many other employers and employees are actively enrolled; (4) consider the investment options and all employer and participant fees; and (5) receive and review a report on plan operations and periodically assess employee satisfaction and complaints at least annually. The Department recognizes that small employers often benefit from compliance guides of the type identified by the commenter. To assist business owners in carrying out their responsibilities under ERISA to prudently select and monitor plan service providers generally, the Department's EBSA, several years ago, published a compliance guide entitled “Tips for Selecting and Monitoring Service Providers for your Employee Benefit Plan.” The Department's EBSA maintains this document on its website and updates it periodically. The Department agrees with this commenter that small businesses may benefit from a checklist or similar guidance on how to discharge their duties to prudently select and monitor the MEP sponsor. Accordingly, the Department will review and possibly update the Tips document taking into consideration the five factors identified by the commenter.

One commenter requested that the Department clarify that the duties of selection and monitoring are essentially the same for employers that decide to participate in a particular MEP as they are for employers that sponsor their own plans and delegate various plan investment and administrative functions to other plan fiduciaries. Otherwise, according to this commenter, any deviation from the existing framework for allocating fiduciary responsibility in the MEP context may create an incentive for employers with existing plans to transition to a MEP for the sole purpose of limiting their liability. One commenter additionally requested that the Department make it clear that, apart from a duty to select and monitor the operations of the MEP, if the employer selects any investment options, the employer must act and be liable in a fiduciary capacity for this act. Generally speaking, the process of selecting and maintaining service providers will vary depending on the plan and services to be provided. Thus, the commenters' questions are too generic to be answered in a vacuum. Nonetheless, the following principles are clear. The bona fide group or association typically, or the PEO always, is responsible for prudently selecting and monitoring the service providers of the MEP they hire, including any fiduciary service providers. In comparison, the business owner must prudently select and monitor the MEP sponsor and get periodic reports on the fiduciaries' management and administration of the MEP. Finally, the decision to include or delete funds from a plan's investment lineup, or to invest plan assets on the participant's behalf in a particular fund on that lineup, is a fiduciary decision, subject to the fiduciary provisions in Title I of ERISA.

b. Need for Reporting and Disclosure Changes

(i) In General

The Proposed Rule solicited comments on whether any reporting or disclosure requirements are needed to ensure that participating employers, participants, and beneficiaries of MEPs are adequately informed of their rights and responsibilities with respect to MEP coverage and that the public has adequate information regarding the existence and operations of MEPs. Most responsive comments stated either that no new substantive requirements are needed, or that the Department should delay rulemaking on this subject until there is more experience with the types of MEPs described in this final rule.

The Department agrees with this position and, therefore, the final rule does not contain modifications to the Department's reporting and disclosure requirements.

The Department received several comments regarding electronic disclosures. Although electronic disclosures, like MEPs, were the subject of Executive Order 13847, they are part of a separate rulemaking process. The Department also received a comment regarding recommended disclosure requirements in an “open MEP” or “pooled employer plan” context. As noted earlier in this preamble, open MEPs are the subject of a separate RFI and are not part of this final rule.

Several commenters asked the Department to confirm that the group or association or PEO sponsoring the MEP, and not the participating employers, are generally responsible for the participant disclosures required by part 1 of ERISA. The Department confirms that the administrator of the MEP—and not the participating employers—is responsible for discharging the reporting and disclosure requirements under part 1 of ERISA. In most cases, the group or association sponsoring the MEP, and in all cases the PEO, will be the ERISA 3(16) plan administrator.

(ii) PEOs and Lists of Participating Employers

Several commenters focused on the public's ability to obtain access to a MEP's annual report, including information regarding the identity of individual participating employers or the employer of a single participant. One commenter, for instance, requested that the administrator of a MEP, such as a PEO, be permitted to file the portions of the Form 5500 annual report that relate to participating employers on a confidential or redacted basis. In this commenter's view, PEOs will be less likely to sponsor a MEP (and participants will suffer) if competitors in the PEO marketplace are able to use publicly available information from the Form 5500 for targeted marketing aimed towards the PEO's client employers identified in the annual report.

Conversely, other commenters favored public access to reported information and recommended that the Department make it even easier to locate and retrieve information about specific participating employers. For example, some commenters requested that the Department's website be modified to enable searches based on the name or EIN of a participating employer, rather than the name or EIN of the sponsor. One commenter, representing a state's department of child support services, stated that such agencies frequently need improved search methods to locate assets of non-custodial parents in order to pursue state domestic relations orders. This commenter believed that reporting should be strengthened to permit searches based not only on the name or EIN of the participating employer, but also based on the name of the plan participant.

After reviewing the comments, the Department concluded that the subject matter is outside the scope of this rulemaking project. The Department may address some or all of this topic in a different rulemaking project in the future, or through subregulatory guidance, but does not otherwise address the comments in this final rule.

(iii) Fee and Conflict of Information Disclosures

Commenters asked whether each participating employer must receive the disclosures required by section 408(b)(2) of ERISA and the regulations thereunder. ERISA section 408(b)(2) and 29 CFR 2550.408b-2(c) require that certain service providers to pension plans disclose to a “responsible plan fiduciary” information about service providers' compensation and potential conflicts of interest. The regulation defines responsible plan fiduciary as “a fiduciary with authority to cause the covered plan to enter into . . . the contract or arrangement.” Typically, the responsible plan fiduciary is the plan administrator (within the meaning of section 3(16) of ERISA) or named fiduciary (within the meaning of section 402 of ERISA) of the MEP, and not the participating or client employer. Thus, to the extent participating or client employers in a MEP do not have such authority, the Department is of the view that section 408(b)(2) and the regulations thereunder do not require the disclosure of this information to them. At the same time, however, if the bona fide group or association or PEO itself is a covered service provider (within the meaning of 29 CFR 2550.408b-2(c)) with respect to the MEP, the group or association or PEO must furnish the specified information about its compensation and potential conflicts of interest to the participating or client employer at the time the participating employer or client employer is considering adopting or subscribing to the MEP and thereafter at intervals specified in the regulation. This information must be disclosed because when the participating or client employer adopts the MEP by executing the participation agreement or subscription document, the participating or client employer effectively is acting as a responsible plan fiduciary with respect to the group or association or PEO.

In addition, participating or client employers have a duty under section 404 of ERISA to periodically monitor ongoing management and administration of the MEP to ensure the prudence of continued participation. Carrying out this duty may be aided by the periodic receipt from the administrator or named fiduciary of the MEP of information similar to that described in 29 CFR 2550.408b-2(c), with respect to other of the MEP's service providers.

If the administrator or named fiduciary were to refuse to provide such information to a participating employer, either periodically or on request, such failure must be taken into account by the participating employer when deciding whether to continue participating in the MEP and, in and of itself, may justify or require a decision to cease participation.

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

See

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.

c. Termination or Severance Situations

Several commenters asked for guidance on severance or termination situations. Specifically, these commenters asked about situations where the participating employer or client employer severs or terminates its relationship with the bona fide group or association or the bona fide PEO, respectively, after having adopted or joined the MEP. The commenters stated that in these situations, while the relationship between the participating employer or client employer and the bona fide group or association or the bona fide PEO is severed, the MEP itself does not necessarily terminate and, consequently, there may be no distributable event on which to authorize distributions of benefits to the employees of the employer. These commenters asked for guidance on whether these benefits may or must remain in the MEP, or whether they may or must be distributed or transferred to another plan, and for clarification of the status of the MEP as a single plan following the severance or termination.

The commenters gave a few examples of likely severance or termination situations. In one example, an employer is a member of a local chamber of commerce, which meets the requirements to be a bona fide group or association, and the employees of this employer participate in the MEP sponsored by the chamber of commerce. The employer terminates its membership with the local chamber of commerce in favor of a statewide chamber of commerce. The employer ceases to have any control over the local chamber of commerce on cancelation of membership, despite the fact that such control is required under paragraph (b)(1)(iv) of the final rule. In another example, a different employer enters into a contract with a PEO that meets the requirements to be a bona fide PEO. This employer had 10 common law employees when it entered the contract with the PEO and enrolled the employees in the MEP sponsored by the PEO. Years later, after a business downturn, the employer must terminate the 10 employees and the only remaining worker is the owner. As a sole proprietor, the business no longer needs the services of the PEO and terminates the contract with the PEO. After termination of the contract, the PEO no longer performs substantial employment functions on behalf of this employer, despite the fact that the performance of substantial employment functions is required under paragraph (c)(1)(i) of the final rule.

Whether the benefits of the employees of a severing or terminating employer may or must remain in the MEP, or whether they may or must be distributed or transferred to another plan should be memorialized in the plan document.

Nevertheless, when a participating employer or client employer severs or terminates its relationship with a bona fide group or association or PEO, the severance or termination ordinarily extinguishes the nexus that supports the conclusion that the group or association or PEO is acting as the “employer” under section 3(5) of ERISA for purposes of sponsoring a plan for the employees of the participating employer or client employer. In this situation, therefore, the group or association or PEO and the participating employer or client employer will commonly want to implement a spin-off of the assets and liabilities of the employees of the severing or terminating employer, or a plan-to-plan transfer of those assets and liabilities to a separate plan meeting the requirements of the Code, if applicable, as soon as is reasonably practicable.

Information Letter to John N. Erlenborn from Dennis M. Kass, Assistant Secretary, Pension and Welfare Benefits Administration, Department of Labor (March 13, 1986) (“we believe that the decision of whether to establish a successor plan, and if so, the type of such a plan, are clearly business decisions not subject to Title I of ERISA. As in the case of the decision to terminate, the decision to establish a successor plan involves the exercise of wholly voluntary settlor functions. Similarly, decisions about the design and provisions of any successor plan are not subject to Title I.”). Decisions on whether benefits may or must remain in the MEP, or whether they may or must be distributed are subject to applicable Code provisions.

Importantly, when a participating employer or client employer severs or terminates its relationship with a bona fide group or association or PEO, the severance or termination does not extinguish any fiduciary obligations that the group or association or PEO owes to these participants as the plan administrator and named fiduciary of the MEP; rather, these obligations persist until the participants are no longer covered by the MEP. Pending a

spin-off or transfer, the MEP generally continues to constitute a single plan for purposes of title I of ERISA. But if the arrangement continues to operate in virtually the same manner as before the severance or termination (including the making of contributions by the participating employer or client employer that severs or terminates its relationship) and no party (the group or association, the PEO, or the participating employer or client employer, as applicable) takes action toward a spin-off or transfer within a reasonable timeframe following the severance or termination, the MEP will no longer constitute a single plan for purposes of ERISA. In this situation, the participating employer or client employer (

i.e.,

the entity that severed or terminated its relationship with the group or association or PEO, failed to promptly implement a spin-off or transfer, and nevertheless continued the arrangement in virtually the same manner as before the severance or termination) will be considered to have established and maintained its own separate employee benefit plan. The group or association or PEO will be considered to be acting as a service provider to the plan of the former participating employer or client employer. The MEP—exclusive of the severed employer but inclusive of all remaining non-severed participating employers or client employers—will continue to constitute a single plan for purposes of title I of ERISA.

d. Plan Governance Issues

Commenters suggested that the Department consider the establishment of various new regulatory provisions governing certain aspects of MEP governance and administration. For example, one commenter recommended that the Department establish minimum standards in order for a person to sponsor and administer a MEP, including a minimum number of years of experience in providing retirement benefits, minimum staff qualifications, and minimum capital reserves. The Department believes it has appropriately addressed issues of MEP governance and administration to the extent such issues fall within the scope and subject of this rulemaking, the definition of “employer” in section 3(5) of ERISA. The Department, however, will give further consideration to these recommendations in connection with the comments received in response to the RFI on open MEPs and any further rulemaking in this area.

One commenter argued that MEPs should be required to have fair rules that apply to all employers, participants and beneficiaries. That commenter suggested that permitting MEPs to maintain multiple different rules for different employers or classes of employers will increase complexity and costs for all. As indicated, a MEP would be a single plan under title I of ERISA. 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.

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.

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 under sections 404(a)(1)(A) and (B) of ERISA.

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.

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).