Associations as Employers: New Proposed Rule from the DOL

Recently, the Department of Labor proposed a new rule concerning whether associations can be considered employers for the purpose of retirement fund creation and expanding the ability of employers to make new associations for retirement funding. To be clear, nonprofit organizations, schools and some churches already have a group retirement fund provision of the tax code, at section 403(b). But previously, the rule had made clear that section 403(b) was only to extend to employers who fell within the Internal Revenue Code’s section 503(c) section. Who’s excluded? Trade associations and unions. That leaves small businesses out in the cold.
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The new rule would allow multiple, smaller employers to band together to offer group retirement plans. But to qualify the employers must have a common affiliation – they must operate in the same industry or trade or be companies with the same owner. The rule also permits associations based on geographic area such as a city or county. That means affiliation can be based on geographic area or by industry. So an MEP can be formed based on employers in Chester County, Pennsylvania or it can be formed based on vape shop owners across the United States.
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While smaller companies could have offered retirement plans before, the administrative costs of running benefits programs, as well as the burden on small staff may have kept some of those companies from doing so. In fact, only 53% of small businesses currently offer a retirement plan to their employees.
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The rule, scheduled to be implemented in 2019, also allows self-employed workers who work more than 20 hours a week to also band together to form multiple employer or association retirement plans.
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The rule also provides that professional employment organizations – those that provide payroll and similar services to small businesses - can act as plan sponsors. Given that many small businesses already rely on companies like ADP, with one estimate putting only 25% of small businesses using a handwritten method of processing, that could mean a significant jump in the number of qualified companies who can become plan sponsors. To a small business, knowing that the benefits or payroll company they may already trust can handle onboarding and other administrative tasks for the retirement plan could be highly motivating. The rule also allows compliance matters to be handled by the payroll company.
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The DOL’s new rule imposes rules that require the Multiple Employer Plan to run like a true association – that is, rules for membership, rules of continuity in membership and that the members must act as plan sponsors and not act at the behest of a bank or financial institution.
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While the regulations are clear and strict on how membership is construed, the fiduciary duties are somewhat more reduced than for 401(k) plans. For MEPs that use a payroll company or band together to form an association retirement plan (ARP), the DOL deems the payroll company or ARP as the fiduciary, not the individual employer. That fact may also induce more small businesses to create retirement plans for their employees.
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The DOL’s rule is nearly identical to legislation that was introduced in 2018 called the Family Savings Act. That bill, which may come up for vote in 2019, would give greater security to MEPs. By being created through an act of Congress, MEPs would only be subject to revocation through an act of Congress. If created by DOL rule, the DOL, without much say from the public, could revoke the MEPs.
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However MEPs are created, advisors should familiarize themselves with the basics of the rule so that they are well positioned to help new MEPs and the currently existing payroll and benefits companies that will need assistance in creating plans and investment policies.