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How Do the IRS and DOL Determine Whether a Closed MEP Exists?

The ERISA consultants at the Learning Center Resource Desk, which is available through Columbia Threadneedle Investments, regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with an advisor in Oregon is representative of a common inquiry involving multiple employer plans. The advisor asked:

“What criteria does the Internal Revenue Service (IRS) and Department of Labor (DOL) consider when determining whether a single multiple employer plan (MEP) exists for an association of employers?”

Highlights of Discussion

A single MEP, otherwise known as a “closed MEP,” is a single employee benefit plan maintained by two or more employers that meets the requirements of Internal Revenue Code Section (IRC §) 413(c), where the employers are not related under IRC §414(b) (regarding a controlled group of employers), IRC §414(c) (regarding trades or businesses under common control), or IRC §414(m) (regarding affiliated service groups).

The IRS has put together a chart that indicates how specific IRC provisions apply to closed MEPs (Internal Revenue Manual, Part 7, Chapter 11, Section 7 Multiple Employer Plans).

The failure of one participating employer or the failure of the plan itself to satisfy an applicable qualification requirement will result in disqualification of the multiple employer plan for all participating employers [Treasury Regulation 1.413-2(a)(3)(iv)]. For example, the failure of any participating employer to satisfy the top-heavy rules disqualifies the entire multiple employer plan for all of the employers maintaining the plan (Treasury Regulation 1.416-1, Q&A G-2).

The DOL categorizes plans covering more than one employer as either a single employee pension benefit plan, or a combination of separate, individual plans. If the MEP is a single plan under ERISA (i.e., a closed MEP), then the plan administrator files a single Form 5500, which requires only one independent audit for the group. Similarly, the ERISA §412 fidelity bonding requirements for a closed MEP apply as if to a single plan, rather than independently as to a series of individual plans.

Pursuant to ERISA §3(5), the DOL requires that the employers in a closed MEP must be part of a bona fide group or association that has something in common besides cosponsoring one or more plans. It is the DOL’s view that where several unrelated employers merely execute identically worded trust agreements or similar documents as a means to fund or provide benefits, in the absence of any genuine organizational relationship between the employers, no employer group or association exists for purposes of ERISA §3(5).

In DOL Advisory Opinion 2012-04A, the DOL opined that determining whether a bona fide employer group or association exists for purposes of maintaining a closed MEP depends on all of the facts and circumstances involved. Relevant factors in judging whether a plan sponsor is a bona fide group or association of employers include the following factors:


  • how members are solicited;

  • who is entitled to participate and who actually participates in the association;

  • the process by which the association was formed;

  • the purposes for which it was formed, and what, if any, were the preexisting relationships of its members;

  • the powers, rights, and privileges of employer members that exist by reason of their status as employers; and

  • who actually controls and directs the activities and operations of the benefit program


The employers that participate in a closed MEP must, either directly or indirectly, exercise control over the program, both in form and in substance, in order to act as a bona fide employer group or association with respect to the program.

Courts have ruled that the entity or group maintaining a closed MEP must be tied to the employees or the contributing employers by genuine economic or representational interests unrelated to the provision of benefits [MDPhysicians & Associates, Inc. v. State Bd. Ins., 957 F.2d 178,185 (5th Cir.), cert. denied, 506 U.S. 861 (1992) and Wisconsin Educ. Assoc. Ins. Trust v. Iowa State Bd., 804 F.2d 1059, 1063 (8th Cir. 1986)].

In DOL Advisory Opinion 94-07A, the DOL emphasized it is the commonality of interest among the individuals that benefit from the plan and the party that sponsors the plan that forms the basis for sponsorship of a closed MEP.

As a rule of thumb, examples of employer associations that are likely to qualify to maintain closed MEPs include:


  • well-established associations whose members are very similar (e.g., members of a particular trade possibly within a specific geographic region);

  • employers related by common ownership (but where ownership does not reach the level to require aggregation under the controlled group rules);

  • employers who regularly and closely cooperate in serving a particular group of clients (but do not aggregate under the affiliated service group rules); and

  • certain Professional Employer Organizations (PEOs).


Conclusion

Under the current regulatory framework, whether several independent employers represent a bona fide employer group or association that is eligible to maintain a closed MEP depends on the facts and circumstances of the particular situation, taking into consideration a number of factors as identified by the DOL in several of its advisory opinions on the topic.

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"Case of the Week" is the winner of an APEX Award for Publication Excellence for 2017.

The Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC (RLC), a third-party industry consultant that is not affiliated with Columbia Threadneedle. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Columbia Threadneedle does not provide tax or legal advice. Consumers consult with their tax advisor or attorney regarding their specific situation.

Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Columbia Threadneedle.

Columbia Threadneedle Investments (Columbia Threadneedle) is the global brand name of the Columbia and Threadneedle group of companies.

©2017, Columbia Management Investment Advisers, LLC. Used with permission.

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