Labor Department rule gives small employers access to DC plans

The Department of Labor unveiled a final rule Monday to narrowly expand the use of open multiple employer plans.

Under the rule, which was proposed in October, businesses could band together to offer employees defined contribution plans, under limited circumstances. The rule lays out a host of conditions a group or association must meet to be permitted to sponsor MEPs, including a requirement to have at least one substantial business purpose unrelated to offering employee benefits to its employee members, and one that requires sponsors to have members with a commonality of interests with respect to their industry or location. The plans could be offered by associations of employers in a city, county, state or a multistate metropolitan area, or in a particular industry nationwide.

“Many small businesses would like to offer retirement benefits to their employees, but are discouraged by the cost and complexity of running their own plans,” said Patrick Pizzella, acting secretary of labor, in a news release. “Association retirement plans offer valuable retirement security to small businesses’ employees through their retirement years.”

The department expects the plans to reduce administrative costs through economies of scale and to strengthen small businesses’ hand when negotiating with financial institutions and other service providers, a senior Labor Department official said Monday.

Professional employer organizations, which perform some or all of the federal employment tax withholding, reporting and wage payment functions for employers, also received some clarity. Under the rule, a safe harbor has been established that states when a PEO can run a retirement plan for employers, including a requirement that it must perform substantial employment functions.

Provisions that make it easier for smaller employers to join open multiple employer plans are already included in the SECURE Act, which overwhelmingly passed the House in May and is under consideration in the Senate.

“As of now, there really is no conflict between the SECURE Act and this rule,” the department official said Monday.
David Levine, principal at the Groom Law Group in Washington, said it makes sense for the department to move on this topic ahead of the legislation. “If SECURE passes at some point, this starts them down the road of being able to build guidance quickly on open MEPs,” he said. “It allows the department to be ready no matter which way things go.”

Also Monday, the department filed a request for information seeking comments on whether it should permit financial institutions to run an open MEP, among other questions.

In August, President Donald J. Trump signed an executive order directing officials at the departments of Labor and Treasury to clarify and expand the circumstances under which U.S. employers, especially small- and midsized businesses, may sponsor or adopt an association retirement plan or MEP as a workplace retirement option for their employees.

One impediment is the IRS’ unified plan rule, which under current rules penalizes all members of an MEP if one member makes a mistake, like providing inaccurate data. On July 3, the IRS proposed an exception to the regulation, also known as the “one bad apple” rule. The IRS proposal would allow non-offending employers in the MEP to claim the exemption if certain conditions are met, such as the disqualifying employer being unable or unwilling to correct the problem or to provide information.

The one bad apple rule is what many consider the biggest barrier to employers joining MEPs. The IRS is currently accepting comments on the proposal.

The Labor Department rule was published in the Federal Register Monday and its effective date is Sept. 30.