New Department of Labor Regulation Expands Access to Employee Benefits

According to the DOL, the families of up to 11 million Americans who work for small businesses or who are sole proprietors lack employer-sponsored insurance. The Congressional Budget Office estimates that 400,000 previously uninsured people will gain coverage under BPs. The CBO estimates that 400,000 previously uninsured people will gain coverage under BPs.

BPs could provide an option for small employers to offer competitive and affordable health benefits to their employees, thereby increasing the number of Americans who receive coverage through their employer. For most midsize-to-large employers and their employees, however, the rule will likely result in no change in health coverage.

Multiple Employer Plans

The proposed regulations seek to clarify that employer groups, 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 “individual account employee pension benefit plan” within the meaning of ERISA Section 3(2). These plans are referred to as “MEPs,” or multiple employer plans.

President Trump's executive order (Aug. 31, 2018) talking explicitly about “open MEPs,” did not create a new framework to promote this type of MEP. It will not require employers to have any links related to industry or geography. The new proposal's framework for PEO-administered benefit plans still seems to require that those employers who buy into the PEO's MEP must have complex and enforceable contractual relationships with the PEO, which itself must meet a number of rules.

Open MEPs are a priority for the benefits industry; advocates indicate open MEPs are one of the primary ways to address the retirement plan coverage gap among employees of small businesses. This step comes after, earlier this year, the Office of Management and Budget finished its review of DOL's MEP proposal, calling it “major” and “economically significant.”

Open MEPs enjoy the broad support of practically every retirement industry provider, analyst and advocate. For this reason, many industry practitioners are using the executive orders as another opportunity to encourage Congress to pass the Retirement Enhancement and Savings Act (RESA). RESA includes a proposal for encouraging the broader use of open MEPs. The sweeping legislation would treat open MEPs as one plan under ERISA and take care of the “one bad apple” rule to prevent one participating employer from disqualifying the whole plan.

Currently, this proposal is just the first issuance in what may be a long rulemaking process. Many advisors may be disappointed the proposal does not address the total areas. Congress has been reviewing the open MEP issue, both in RESA and more recently in the Family Savings Act. RESA was passed earlier this year by the House.

There are significant regulatory changes that may in fact allow providers with the capability of serving as a bona fide PEO to dramatically expand the BPs they offer. The proposal modifies the rules for so-called “closed MEPs” run by employer groups or associations, while it also clarifies rules with respect to BPs sponsored by PEOs. There are similarities with some of the modifications to joint employment agreements both regulatory and judicial expansions. Additionally, the Administration is reviewing with the goal of the removing the modifications issued under the Obama Administration. The proposed regulations provide that a bona fide group or association of employers and bona fide PEOs are deemed to be acting in the interests of an employer, and thus, can establish benefits plans so long as they satisfy the DOL's regulatory requirements.

The first part of the proposal, pertaining to employer groups and associations, still requires that employers share a common “nexus” allowing the plan to be treated as a MEP for the purposes of compliance with ERISA. They are called “closed MEPs.” The advantages of a closed MEP structure are still significant and include the requirement of only a single audit, bond and Form 5500 Annual Returns/Report.

Under the proposed regulations, the group or association of employers is considered “bona fide” if seven requirements are met — although some safe harbors are programmed in to ease these requirements.

The new regulation's conditions for a proving an entity is a bona fide PEO are different than those for closed MEPs in two chief respects.

1. The PEO must have substantial control over the functions and activities of the MEP as the plan sponsor, plan administrator, and named fiduciary; and
2. The PEO must perform 'substantial employment functions' on behalf of the employers. Whether a PEO meets this requirement is based on a facts and circumstances test under which nine criteria are considered, but not all must be satisfied.

The DOL also proposed two safe harbors in order provide more certainty with respect to the substantial employment functions test.

Fiduciary Considerations and Other Matters

The preamble to the proposal makes it clear that BP participating employers would retain limited fiduciary responsibilities. Employers would be required to be prudent in the selection and monitoring of service providers and would also be responsible for the timely remittance of contributions to the plan.

An issue not addressed in the proposed regulations — as it is a Treasury Department rather than a DOL issue — is the “one bad apple rule.” This is the rule under which the action of one participating employer with respect to the MEP can jeopardize the tax qualified status of the BP for all other participating employers.

The Treasury Department is expected to modify this rule. The DOL indicated in the preamble that nothing in the proposed regulations has any effect upon joint employer issues. The joint employer test was expanded by the Fourth Circuit in Salinas v. Commercial Interiors, Inc., No. 15-1915 (Jan. 25, 2017), directing the relationship to be between the many employers and not employee-employer.

The Proposal treats a PEO plan as one plan, rather than individual plans adopted by each client-employer, if the PEO constitutes a bona fide PEO. To do that, a PEO must:

1. Provide substantial employment functions and maintain adequate records relating to such functions;
2. Have substantial control over the functions and activities of the MEP, as the plan sponsor, the plan administrator, and a named fiduciary of the plan;
3. Ensure that each of its client-employers that adopt the MEP acts directly as an employer of at least one employee who participates in a MEP; and
4. Make the MEP available only to employees and former employees of the PEO and its clients, and their beneficiaries.

To meet the first requirement — providing substantial employment functions — the PEO must be responsible for at least some of the following, regardless of whether the client-employer shares some or all of such responsibilities or whether the client-employer has fulfilled its obligation to reimburse payments by the PEO:

• Paying wages to the employees;
• Wage reporting, withholding, and employment taxes;
• Recruiting, hiring, and firing workers of the client-employers;
• Establishing employment policies and conditions of employment, and supervising employees;
• Determining employee compensation (including method and amount);
• Providing workers' compensation coverage;
• Providing integral human-resource functions of the employer-clients, such as job-description development, background screening, drug testing, employee-handbook preparation, performance review, PTO tracking, handling employee grievances or exit interviews;
• Complying with regulatory rules for workplace discrimination, family-and-medical leave, citizenship or immigration status, workplace safety and health, or Program Electronic Review Management labor certification; and
• Maintaining employee-benefit-plan obligations to participants after the client-employer ceases to contract with the PEO.

The DOL provides two safe harbors related to the first requirement of performing substantial employment functions. If the PEO qualifies as a Certified PEO (CPEO) under Internal Revenue Code Section 7705(a), it must perform only two of the above functions to satisfy the first requirement. Alternatively, if the plan provides five of the nine listed functions, it automatically satisfies the first requirement. Outside of the two safe harbors, it is a facts-and-circumstances test, but in the right situation, a single function could be adequate to satisfy the first requirement.

It must be stressed that these are only proposed regulations. However, it's parallel — the Association Health Plan regulations — went from proposed to final in just a few months. The Proposal does nothing to change existing single employer plans; it just provides additional options for an employer, particularly a small employer, to participate in a MEP.

The Proposal however does not address the types of MEPs that non-PEO service providers want to make available to their clients. We hope that the comments to the DOL will spur action on that front or that Congress passes one of the pending bills that would give single-plan treatment to Open MEPs. In addition to 401(k) plans, PEOs also typically offer welfare benefit plans. Often, the PEO makes a health plan available for its co-employers. Coupled with that plan, PEOs may administer a cafeteria plan that permits co-employees to pay their portions of the premiums for the health plan and group term life insurance on a pre-tax basis. The PEO will be able to deduct the qualified direct costs (IRC§§ 419(b)&(c)). This will allow the PEO to deduct the present value of the death benefit funded over the working lives of the participants, worksite employees (WSE). This amount may be actuarially determined annually and thereby permit the PEO a deduction much greater than the economic benefit pursuant to IRC §79 and US Patent 6,609,111, which is the income to the WSE. (See decision tree below.)

The PEO typically either has a cafeteria plan document that it provides to its co-employers to use or a document that has an adoption agreement where co-employers can customize the plan. The cafeteria plan document will permit pre-tax payments for the employee's portion of the premium. Typically, the group term life benefits are provided through the purchase of insurance by the PEO on behalf of the client employers. There are also PEO-sponsored health plans that are designed to be self-funded with a stop-loss policy.

Analysis

There are significant advantages for co-employers to use the benefit plans sponsored by a PEO. Because the costs of the benefit is a currently deductible to the provider of the benefits there may be a substantial tax benefit to the PEO or other employee organization These programs are not simple, but with service providers knowledgeable in the PEO and benefits world, they can provide a solid benefit package for the work site employee and cost savings for the co-employer.

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Lawrence L. Bell, JD, LTM, CLU, ChFC, CFP®, AEP, a member of this newsletter's Board of Editors, has served as Tax Bar liaison to the IRS for 10 years. He has received patents in actuarial product fields dealing with COLI, GASB, FASB, IASB and OPEB solutions. To learn more, visit www.mycpo.net.