A new, proposed Department of Labor (DOL) rule could help employees that don't have access to employer-provided retirement plans save for retirement.
The public comment period of a proposed Department of Labor (DOL) rule titled “Definition of ‘Employer’ Under Section 3(5) of ERISA—Association Retirement Plans and Other Multiple-Employer Plans” was scheduled to close Dec. 24, 2018, with implementation expected early in 2019.
The rule was crafted in response to an executive order issued by President Donald Trump in August. It is designed to strengthen retirement security by letting working Americans with no job-related retirement savings plan, such as a 401(k), gain access to one through an entity known as an association retirement plan.
Behind the push for action lies the fact that only 53% of employees at small companies with fewer than 100 workers have access to a workplace retirement plan compared to 89% of employees at companies with 500 or more workers. According to the Pew Charitable Trust, most small businesses that don’t offer a retirement savings plan cite high cost and the complexity of managing a retirement plan as the main reasons.
The new rule defines a group of employers as a "single employer" under a type of multiple employer plan (MEP) known as an association retirement plan (ARP). Under the proposed rule, individual businesses with employees, as well as self-employed business owners who work at least 20 hours per week or make enough to cover the cost of association health insurance, can participate in a retirement plan through an ARP.
The rule provides a way for companies and self-employed individuals to join an MEP with another connection or common bond, such as being part of the same industry or located in a geographic area covered by one Chamber of Commerce.
This differs from an “open multiple employer plan,” in which the only connection companies have is membership in the plan. Legislation authorizing open MEPs is pending in Congress but has not yet been voted on by the full chamber.
Rules for ARPs
In addition to the “common bond” provision, the DOL rule stipulates an ARP must:
- have a formal organizational structure
- be controlled by member companies (specifically not by a bank, insurer or financial services firm)
- limit participation to employees and former employees of member companies
Additionally, each member company must be the direct employer of at least one employee participating in the ARP.
PEO Participation Asserted
The DOL rule also provides for professional employer organizations (PEOs), which are human-resource companies that provide joint employer services such as payroll, tax withholding and reporting functions to businesses, to sponsor 401(k)s for their clients.
In fact, most PEOs already offer MEPs to their clients. The new rule merely re-asserts that right for PEOs that either participate in the IRS-certified PEO program or provide more than half of the services typically provided by PEOs. (See ‘Substantial Employment Functions Criteria’ below.)
A PEO acting as an employer must:
- assume at least some of the major employer roles of their clients
- control the MEP and fulfill certaian ERISA roles
- confirm at least one employee from every company is participating in the MEP
- ensure only current and former employees and their beneficiaries are participating
“Substantial Employment Functions” Criteria
To satisfy the requirement that it fulfill “substantial employment functions,” a PEO must either be a certified professional employer organization (CPEO) within the definition of Internal Revenue Code 7705 or meet five or more of the following criteria:
- pay employees regardless of whether or not the funds have been covered by their client
- manage all employment taxes for their client
- participate in the recruiting and terminations of employees
- assist in supervising employees and enforcing company policies
- assist employer in setting employee wages, salaries and
- provide workers' compensation coverage
- function as or assist the company’s human resources department
- oversee regulatory compliance issues, including discrimination, FMLA, OSHA requirements and employee citizenship status
- continue to provide benefits to employees even if the company’s contract ends
Fiduciary Oversight Reduced
An important component of the proposed DOL rule reduces (but does not eliminate) the fiduciary duties of member companies of the ARP or PEO. The underlying sponsor of the ARP or PEO would be the named fiduciary, thereby relieving individual employers of most fiduciary obligations and administrative tasks. The primary role of member companies would be to participate in the selection and monitoring of the sponsor and, of course, in making employer and employee contributions to the MEP on a timely basis.
“Bad Apple” Rule Not Addressed
Not addressed in the DOL rule is the so-called “bad apple rule,” which can disrupt the MEP or disqualify all member companies from participating if one member breaks a rule or commits an administrative error. Relief may come, however, from legislation pending in Congress that addresses this issue. Furthermore, the IRS has said it expects to issue a notice of proposed rulemaking on “bad apple” by April 2019, and Trump’s August executive order specifically instructs the Secretary of the Treasury to propose amendments or guidance on this rule.
The U.S. House of Representatives passed the Family Savings Act in September and the Retirement Enhancement and Savings Act (RESA). Both pieces of legislation go further than the DOL rule to permit open MEPs, address bad apple issues and provide additional incentives that solve other problems. For example, this new legislation could only be rescinded by Congress, whereas the DOL rule could be wiped out by a future administration.
The Bottom Line
The DOL says it expects its new rule to “reduce administrative costs through economies of scale and to strengthen small businesses' hand when negotiating with financial institutions and other service providers.” While industry reaction to the new DOL rule has been generally positive, many observers believe the rule does not go far enough. Instead they suggest what is ultimately needed is passage of the legislation pending in Congress.