DOL proposes rule easing multiple employer plan restrictions

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The Department of Labor on Monday released a proposed rule that would make it easier for small businesses to offer retirement plans to employees.

The proposed regulation would allow small businesses to form multiple employer plans, in which companies band together to offer 401(k) plans to their employees. The arrangements are currently allowed for employers with an affiliation or connection, such as companies with a common owner or members of the same industry trade association.

Under the proposed rule, MEPs could be formed by associations of employers in a city, county, state or a multistate metropolitan area, or in a particular industry nationwide, according to the DOL.

Sole proprietors, as well as their families, would be also permitted to join such plans, the DOL said. Professional employer organizations, which are human resources companies that contractually assume certain employment responsibilities for its client employers, could also sponsor plans.

The proposed rule is part of an effort by the administration to help close a retirement plan coverage gap that affects millions of employees. President Trump earlier this summer signed an executive order directing the DOL and Treasury to remove some of the barriers keeping small businesses from providing workers access to retirement plans.

Government figures indicate that about 90% of employees at large companies have access to a workplace retirement plan, but only around half of those at smaller firms can contribute to an employer-sponsored plan.

“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,” Alexander Acosta, Secretary of Labor, said in a news release. The proposal would give these employers “a simple and less burdensome way to offer valuable retirement benefits to their employees,” he added.

Supporters say MEPs are one of the primary ways to address the retirement plan coverage gap among employees of small businesses.

“MEPs offer a cost-effective way for small employers to provide retirement benefits to their employees by pooling resources with other small employers,” says Deborah Hembree, senior counsel with employment law firm Constangy, Brooks, Smith & Prophete.

Small employers that participate in a MEP can benefit by having lower fund fees, lower administrative costs and the ability to transfer the fiduciary responsibility to the MEP sponsor, who is obligated to ensure compliance with ERISA, Hembree adds.

"By clarifying its interpretation of who is an ‘employer’ and providing clear standards for MEPs, the DOL is sending the message to PEOs and employer groups and associations that MEPs are a welcome alternative to single-employer plans,” she says.

Meanwhile, Prudential has been vocal in pushing Congress, the IRS and the DOL to fix and modify several MEP requirements. One of those requirements is the so-called “bad apple” rule. As currently interpreted, some of the MEP requirements, such as nondiscrimination rules, are applied on an employer-by-employer basis rather than a plan basis. This means that just one noncompliant employer can jeopardize the tax status of the entire plan, putting all employers at risk.

Although not included in the DOL’s proposal, the Treasury Department says the IRS intends to issue a notice of proposed rulemaking to address the “bad apple” rule. There is also legislation on Capitol Hill that would help provide employers relief from the one bad apple rule so that all employers in a MEP won’t be penalized when one employer violates the qualification rules.

The proposed rule is scheduled to be published in the Federal Register Tuesday.

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401(k) Retirement planning Retirement benefits Financial planning DoL Treasury Department