Multiple Employer Plan (MEP) Retirement Plan Rules & Issues.
Alson R. Martin
Lathrop & Gage LLP
10851 Mastin Boulevard
Suite 1000
Overland Park, KS 66210-1669
amartin@lathropgage.com
A.
Overview.
MEP Defined. A multiple employer plan ("MEP") is a retirement plan adopted by two or more
employers who are unrelated for income tax purposes (that is, not members of a controlled or
affiliated service group, which are treated as if they are one employer). It is not a multi-employer
plan, which is a union plan that is collectively bargained. Nor is a MEP a Multiple Employer
Welfare Arrangement (MEWA), which provides health and welfare benefits to employees of two
or more unrelated employers who are not parties to bona fide collective bargaining agreements.
Those welfare arrangements are subject to a separate set of rules from those applicable to
retirement plans.
Despite the fact that MEP retirement plans have existed since the 1950s, proper MEP operation
and compliance remains uncertain due to a lack of guidance from the Internal Revenue Service
("Service" or “IRS”) and the Department of Labor ("DOL"). Furthermore, the guidance that has
been issued by the Service and the DOL conflicts in certain instances.
MEP Types. There are three types of MEPs. The first type of MEP is a retirement plan sponsored
by a Professional Employer Organization („„PEO‟‟) that is adopted by the PEO‟s clients; the
second is a MEP sponsored by an industry or trade group to be adopted by the group‟s members;
and the third is a MEP co-sponsored by the participating employers who have no relationship or
connection to each other other than participating in a common plan (the "open" MEP). The legal
status of the first and third type is uncertain due to the DOL commonality requirement, discussed
below.
Possible Benefits. The possible benefits of a MEP to an employer that are often touted by MEP
promoters include the elimination of most plan sponsor functions, such as an annual plan audit
and Form 5500 filing, and some plan fiduciary functions, such as choosing which investment
options will be available to plan participants. Generally, MEP adopting employers no longer file
a Form 5500, maintain a fidelity bond, or bear the responsibility for ERISA 408(b)(2)
compliance with respect to covered service provider disclosures responsible plan fiduciaries first
effective in 2012. These functions are generally handled by the MEP plan sponsor, not the
adopting employer. For some employers, this benefit is inconsequential. For others, the desire to
let third parties run the plan can be more important than either the audit relief or fiduciary risk
mitigation.
Risks. However, there are several risks and realities that must be understood by employer that is
making a decision whether to adopt a MEP retirement plan. First, the DOL has imposed a
commonality requirement on employers adopting welfare plans. If the DOL were to apply this
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requirement to MEPs, failure to meet the requirement would mean that the plans are separate
plans, which would require each plan to meet the various notice and reporting requirements,
which it would fail to do since it was relying on the MEP sponsor, which would expose it to
various penalties.
Second, if either the IRS or the DOL decides the plan is not a MEP, each can fine the employer
for not filing 5500s for their plan, even if the MEP has filed a 5500 for all of their plans. The
failure to file penalties are very substantial.1
Third, if one employer violates the qualified retirement plan rules, such as the top heavy or
vesting rules, the entire plan and all the adopting employers can face plan disqualification or
nondeductible monetary sanctions on the employers. Reg. § 1.413-2(a)(3)(iv). I have been in an
audit with a national coop, whose local coops adopted it multiple employer plan, and we settled
it for a penalty in six figures. The initial proposed penalty was over $1 million. The existence of
the Service‟s Employee Plans Compliance Resolution System, which is available for plan
sponsors to voluntarily correct plan failures in the audit and non-audit context, makes MEP plan
disqualification is much less likely, but only if the employers agree to pay nondeductible
penalties.2
Fourth, the adopting employer remains responsible for some ERISA requirements that cannot be
eliminated, as discussed in more detail below.
Fifth, the MEP sponsor must cover its own employees in the plan, or the IRS s likely to find the
MEP invalid.
Sixth, when an employer wants to leave the MEP and have its own plan, its participating
employees can only be paid their share of plan assets if there is a payment event, which this is
not. However, a spin off may be possible under Code § 414(l).
MEP Alternative - Each employer sets up a separate plan (with the assistance of a coordinator.
The coordinator provides administrative services. A Master Trust is used for investment and to
hold participant funds. The setup works.
IRS Determination Letter. If one or more participating employers wants its own individual IRS
determination letter, a separate fee schedule applies, based on the number of Forms 5300 being
filed. A Form 5300 is filed for the plan as a whole, and an additional Form 5300 is filed for each
participating employer requesting a separate determination letter. See section 10.02(2) of the
general determination letter procedure, Rev. Proc. 2011-6. Thus, for purposes of the user fee, the
1
Plan administrators who fail to file an annual report may be assessed a penalty by the DOL of $300 per day, up to
$30,000 per year. The IRS non-filing penalty is $1100 a day up to $15,000 per year. The penalties continue to run
until a complete report is filed. The penalty must be paid by the employer.
2
Rev. Rul. 2008-50, § 10.12. The plan administrator of a MEP, rather than any contributing or participating
employer, must request consideration of the plan under the Service‟s correction programs, and the request must be
made with respect to the entire MEP, rather than a portion of the MEP affecting any particular employer. Id. In some
instances, however, the plan administrator of the MEP may choose to have the correction compliance fee calculated
separately for each employer based on the assets attributable to that employer, rather than being attributable to the
assets of the entire plan. Id.
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number of Forms 5300 being filed includes the Form 5300 being filed by the primary sponsor.
Each participating employer that wishes a determination letter files a separate Form 5300,
completed through line 8, a completed adoption agreement, if applicable, and then may complete
the coverage questions and request determinations for which Schedule Q is needed. If the
multiple employer plan is adopted by other employers after the initial submission, the normal
determination letter application fees would apply to a determination letter requested by such
employer.
What Responsibilities Remain For the MEP Employer? Those remaining employer
responsibilities include:

The decision to adopt or terminate participation in the MEP.

The responsibility for selecting and monitoring the MEP sponsor and perhaps the plan
investments unless those are handled by a separate named fiduciary. The employer would
be responsible for the prudent selection and monitoring the performance of that fiduciary.
An employer retains sufficient discretionary authority or control respecting management
of a plan to be a fiduciary where the employer had the authority, exercised through its
board of directors, to appoint and to remove the trustee, to amend the terms of the plan,
and to establish the amount of employer contributions to the plan. Bradshaw v. Jenkins, 5
EBC 2754 (DC WA 1984). Moreover, a corporate employer, by virtue of its power to
amend the plan, has the power to select a new insurance company and a new
administrator to administer the plan. This was sufficient to make the employer a
fiduciary. Ed Miniat Inc v. Globe Life Insurance Group Inc, 805 F2d 732 (7th Cir. 1986),
cert den 482 US 915 (1987).

Determining if MEP employers meet the DOL's commonalty rule, if required of MEP
retirement plans.

The need to make timely and accurate plan contributions.

Plan design decisions, such as the level of match.

Distribution to participants of required notices and information unless handled by the
MEP plan sponsor.

Communication and enrollment assistance for participants unless handled by the MEP
plan sponsor.
Mechanics Of Adoption Of MEP; Restatement vs Termination. Where an employer has an
existing plan and wants to transfer its assets to a MEP, this is not a classic merger of plans since
the employer's plan continues to exist in the multiple employer context. Likely, where the
employer has an existing plan, adoption of a MEP may be treated merely a restatement of the
single-employer plan to become a member of the multiple employer plan, but the fact that the
MEP sponsor and EIN are different may require a termination or a spin-off under Code § 414(l).
If the employer's plan and the MEP are a 401(k) plan, a termination of the employer's single
employer plan will not allow payment to participants. So the employer will be required to
continue its plan or do a spin-off, if the MEP will accept its plan assets in that type of procedure.
B.
Questions To Ask When Selecting a Multiple Employer Plan.

Will existing plan features must be changed, if any?
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







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Do the employers meet the DOL's commonality requirement (or has the DOL disavowed
that position for retirement plans)? See DOL Adv. Op. 2001-4.
How much will the annual audit expense be? CPAs advise that a major cost of the plan
audit arises from testing the compensation, deferrals, and other census derived
compliance components of the plan‟s administration. Where each employer participating
in the MEP does its own payroll (or does it through its payroll service), there is no
commonality of payroll, so it is doubtful that there are substantial economies to an audit
for such a MEP.
Is the plan trying to apply the audit once every 4 year rule that only applies to multiemployer and not MEP plans? Who is handling the administration (TPA) work, fiduciary
oversight, and plan operations?
What are the credentials and MEP expertise of the various parties involved with the
MEP? The adopting employer has the duty to prudently select and monitor.
How long have the parties to the MEP been involved with MEPs?
Is there an ERISA attorney advising the MEP and maintaining the plan document? If so,
what is their background specific to MEPs?
How are all of the parties paid? Are there potential conflicts of interest or prohibited
transactions?
If you wish to retain your current adviser within an MEP arrangement, are they adviserfriendly, holding themselves accountable and transparent to the adopter‟s adviser?
Is there a proper separation of the roles and ownership structure of the MEP‟s plan
sponsor, independent fiduciary, and contracted service providers?
What measures does the MEP take to terminate noncompliant adopting employers that
could negatively affect the entire MEP? Does the MEP contract allow them to
unilaterally push out adopters with compliance problems?
C. Participating employers treated as single employer for certain purposes. IRC §413(c)
allows the participating employers in a multiple employer plan to be treated as a single employer
for certain purposes, even though these employers are not related under any of the related
employer definitions under IRC §414(b), (c), (m) or (o).
1.
Eligibility. In IRC §413(c)(1), the plan must apply the minimum age and service
requirements under §410(a) as if the employers are a single employer. For example, service with
all the participating employers is counted in determining an employee‟s eligibility to participate
in the plan.
2.
Exclusive benefit rule. IRC §413(c)(2) applies the exclusive benefit rule as if the
employers are a single employer. This permits the allocation of contributions and forfeitures
across company lines without violating the rule that an employer's contributions must be made
for the benefit of its employees and former employees.
3.
Vesting. IRC §413(c)(3) treats the employers as a single employer for vesting purposes.
For example, service with all the participating employers is counted in determining an
employee's position on the vesting schedule. Further, the discontinuance of contributions and
partial termination rules of Code Section 411 also apply to MEPs as if all employers
participating in the MEP were one single employer. I.R.C. § 413(c)(3). See also Reg. § 1.4132(a)(iii).
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4.
415 Annual Addition Testing - Treat As One Plan. To apply the IRC §415 limits with
respect to a participant, total compensation received by the participant from all of the employers
maintaining the plan is taken into account, unless the plan specifies otherwise. For example, in a
multiple employer plan that is a defined contribution plan, the compensation from all the
participating employers is aggregated to determine the participant's §415(c) limit and the annual
additions in the plan with respect to all the participating employers are aggregated to determine if
the limit is exceeded. Reg. § 1.415(a)-1(e). In general, „„annual additions‟‟ mean the sum,
credited to a participant‟s account for any limitation year of: (1) employer contributions, (2)
employee contributions, and (3) forfeitures. See Treas. Reg. § 1.413-6(b)(1)(i).If the employers
had maintained separate plans this rule would not apply, and the section 415 limits would be
separately determined for each employer because they are not part of a related group.
5.
402(g) Elective Deferral Limits. For purposes of the elective deferral limit under Code
Section 402(g), the limit is based on deferrals from compensation earned by all employers
participating in the MEP.
6.
Plan Disqualification. If any one employer fails to meet any requirements that are tested
or required on an employer-by employer basis, the entire MEP fails to meet the qualification
requirements of the Code. Reg. § 1.413-2(a)(3)(iv).
D. Participating employers treated as separate employer for certain purposes.
1.
Coverage, nondiscrimination and top heavy testing. The coverage and nondiscrimination
testing rules are performed by each participating employer as if that employer maintained a
separate plan. Treas. Reg. §1.413(c)-2(a)(3). In addition, each participating employer is treated
as having a separate plan for purposes of top heavy testing. See Treas. Reg. §1.416-1, G-2. Only
related employers are treated as a single employer for coverage, nondiscrimination and top heavy
testing purposes.
2.
HCE Status. The employee‟s compensation for services to the participating employer
being tested should be considered employer by employer. I.R.C. § 413(c)(6) and Treas. Reg. §
1.414(q)-1T, Q&A-6. For example, if an employee‟s total compensation from all employers in
the plan is $185,000, with $150,000 paid by Corporation A and $35,000 paid by unrelated
Corporation B, the employee would be a highly compensated employee for purposes of
Corporation A‟s test but would not be a highly compensated employee for Corporation B‟s test.
The ownership HCE test would also be applied employer by employer.3
3.
Deductions. The contribution deduction limits are applied as if each participating
employer maintains a separate plan. See I.R.C. § 413(c)(6).
4.
401(k) ADP & ACP Testing. The MEP must be disaggregated for purposes of ADP and
ACP testing. Reg. § 1.401(k)-1(b)(4)(iv); Reg. § 1.401(m)-1(b)(4)(iv).
5.
Funding. If the multiple employer plan is a pension plan, the minimum funding
requirements under IRC §412 generally are determined as if each participating employer
maintained a separate plan. See IRC §413(c)(4)(A) and Treas. Reg. §§1.430(d)-1(a)(3), 1.430(g)1(a)(2), 1.430(h)(2)-1(a)(2), and 1.403(i)-1(a)(2). Thus, the minimum required contribution is
3
A highly compensated employee is any employee who was a 5 percent owner of the company anytime during the
year or preceding year or, for 2011, had compensation in excess of $110,000 ($115,000 for 2012). I.R.C. §
414(q)(1).
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computed separately with respect to each participating employer. For purposes of both §§ 404
and 412, plan assets and liabilities are treated as assets and liabilities of a plan of each employer
to the extent they would be allocated to the employer if it withdrew from the plan. IRC §
413(c)(7)(B).
An exception applies for plans established before January 1, 1989, under which funding may be
determined as if the employers are a single employer (unless the plan has elected IRC
§413(c)(4)(A) to apply). See IRC §413(c)(4)(B). Similarly, the deduction limits are applied as if
each participating employer maintains a separate plan, subject to an exception that permits single
employer treatment for certain plans established before January 1, 1989. See IRC §413(c)(6).
E.
Where It Is Not Clear If Employers Are Treated As One Or Separate.
1.
Can Different Employers Make Different Levels Of Contributions Allocated To Each
Employer‟s Employee-Participants? The well-known and widely used book S. Tripodi, The
ERISA Outline Book, in the section in chapter 1A, in discussing the definition of multiple
employer plan, states: “In our view, whether each employer separately contributes for its
employees is not the issue. Instead, the “single plan” issue should turn on the plan's treatment of
invested assets with respect to its liabilities to make benefit payments. For the plan to be treated
as a collection of separate plans under this view, the investments made with respect to each
contributing employer's contributions would have to be separately accounted for, so that a
participant's benefits earned with respect to contributions made by that employer could be paid
only from the investments attributable to such contributions. Proponents of this view point in
particular to §1.414(l)-1(b)(1)(i) and (v), which states that a plan does not fail to be a single plan
merely because "the plan has several distinct benefit structures which apply either to the same or
different participants," or because "separate accounting is maintained for purposes of cost
allocation but not for purposes of providing benefits under the plan."
However, the Tripodi book says that there is some doubt about this: “Under the opposing view,
the mere separate calculation of contributions on behalf of participants, which is determined
along company lines, creates separate plans under IRC §414(l), even if the plan does not
separately account for the investments attributable to such contributions. Under this theory,
[employers] would be treated as maintaining separate plans, rather than a multiple employer
plan, even though the companies operate their plans under a single plan document.
Due to this issue, a separate IRS determination letter for a plan allowing different levels of
employer contributions is very important.
2.
Forfeiture Allocation In DC Multiple Employer Plan – Must They Be Allocated
Uniformly To All Employers‟ Participants? This too is an area of some uncertainty. Sal Tripodi
in his book continues: “When a participant incurs a forfeiture under a multiple employer plan,
how does the plan deal with the allocation of such forfeitures? Are the forfeitures allocated to all
participants, regardless of which employer contributed the funds attributable to that forfeiture, or
are the forfeitures allocated only to the participants employed by the company whose
contributions are attributable to the forfeiture? Should the manner in which the plan deals with
forfeitures affect whether the plan is a single plan? Some practitioners feel that the allocation
method for the forfeitures is irrelevant to the single employer determination. . . . Proponents of
this first view argue that the allocation of the forfeitures to the employees of a particular
employer is simply a means of determining how much each participant's account increases for
that plan year with respect to services with that employer, and does not mean that funds
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attributable to that employer are available only to pay benefits of that employer's employees.
When the plan pays benefits, the funds used to satisfy that payment might be attributable to
investments made with respect to contributions (or forfeitures) attributable to a different
company. . . . Other practitioners take the view that, in order to have a single plan, the plan must
allocate the forfeitures to all participants who are eligible for allocations for that year, regardless
of which company made the contributions attributable to that forfeiture.”
Due to this issue, a separate IRS determination letter for a plan allowing forfeiture allocation
employer by employer is very important.
F.
Other Issues.
Fee Negotiated Prior To Becoming Fiduciary Is Not Fiduciary Breach. An action cannot be
sustained against a fiduciary for obtaining an excessive fee for his services to the plan if the fee
was negotiated before he became the administrator. A person is only a fiduciary with respect to
things over which he has control and discretion. F.H. Krear & Co v. Nineteen Named Trustees,
810 F.2d 1250 (2d Cir. 1987). However, even though a plan administrator's fee was negotiated
before he became the administrator, he is a fiduciary with respect to the commissions received
where his compensation is based on a percentage of claims paid and he exercised discretion over
which claims would be paid. The administrator's fiduciary status is not diminished by the fact
that the plan trustees had final authority to grant or deny claims and approve investments.
American Federation of Unions Local 102 Health & Welfare Fund v. Equitable Life Assurance
Society, 841 F2d 658 (5th Cir. 1988).
Prohibited Transactions. There is a PT issue if the fees and expenses deducted from participants‟
accounts, or from the trust as a whole in the case of a DB plan, are not solely plan expenses, i.e.,
if they include settlor expenses, such as the cost of adopting the plan.
Possible Plan Asset Issues. The Plan Asset Regulations generally provide that when a Plan
subject to Title I of ERISA or Section 4975 of the U.S. Internal Revenue Code.(an “ERISA
Plan”) acquires an equity interest in an entity that is neither a “publicly offered security” (as
defined in the Plan Asset Regulations) nor a security issued by an investment company registered
under the U.S. Investment Company Act, the ERISA Plan‟s assets include both the equity
interest and an undivided interest in each of the underlying assets of the entity unless it is
established either that equity participation in the entity by “benefit plan investors” is not
significant or that the entity is an “operating company,” in each case as defined in the Plan Asset
Regulations. For purposes of the Plan Asset Regulations, equity participation in an entity by
benefit plan investors will not be significant if they hold, in the aggregate, less than 25% of the
value of each class of equity interests of such entity, excluding equity interests held by any
person (other than a benefit plan investor) who has discretionary authority or control with respect
to the assets of the entity or who provides investment advice for a fee (direct or indirect) with
respect to such assets, and any affiliates of such person. For purposes of this 25% test, “benefit
plan investors” include all employee benefit plans, whether or not subject to ERISA or the U.S.
Internal Revenue Code, including “Keogh” plans, individual retirement accounts and pension
plans maintained by non-U.S. corporations, governmental plans, as well as any entity whose
underlying assets are deemed to include “plan assets” under the Plan Asset Regulations (for
example, an entity 25% or more of the value of any class of equity interests of which is held by
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benefit plan investors and which does not satisfy another exception under the Plan Asset
Regulations).
If assets are “plan assets” of an ERISA Plan whose assets were invested in us, this would
result, among other things, in (i) the application of the prudence and other fiduciary
responsibility standards of ERISA to investments made by us, and (ii) the possibility that certain
transactions that we, our Managing General Partner, the Investment Partnership and the
subsidiaries of the Investment Partnership might enter into, or may have entered into, in the
ordinary course of business might constitute or result in non-exempt prohibited transactions
under Section 406 of ERISA and/or Section 4975 of the U.S. Internal Revenue Code and might
have to be rescinded. A non-exempt prohibited transaction, in addition to imposing potential
liability upon fiduciaries of the ERISA Plan, may also result in the imposition of an excise tax
under the U.S. Internal Revenue Code upon a “party in interest” (as defined in ERISA), or
“disqualified person” (as defined in the U.S. Internal Revenue Code), with whom the ERISA
Plan engages in the transaction.
Commonality. DOL Adv. Op. 2001-4. Based upon the DOL‟s informal view, PEO MEP plans
are permitted, but "open" MEP plans may not be ok if there is no bona fide employer group or
association. The income tax and ERISA Title I focus is different on this issue. The term
employer is defined in section 3(5) of ERISA as any person acting directly as an employer, or
indirectly in the interest of an employer, in relation to an employee benefit plan; and includes a
group or association of employers acting for an employer in such capacity. The department has
taken the view, on the basis of the definitional provisions of ERISA as well as the overall
statutory scheme, that, in the absence of the involvement of an employee organization, a
multiple employer plan (i.e., a plan to which more than one employer contributes) may,
nevertheless, exist where a cognizable, bona fide group or association of employers establishes
a benefit program for the employees of member employers and exercises control of the
amendment process, plan termination, and other similar functions on behalf of these members
with respect to a trust established under the program. On the other hand, where several unrelated
employers merely execute participation agreements or similar documents as a means to fund
benefits, in the absence of any genuine organizational relationship between the employers, no
employer association can be recognized.
A determination of whether a group or association of employers is a bona fide employer group
or association must be made on the basis of all the facts and circumstances involved. Among
the factors considered are the following: 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. In addition, the employers that participate in a benefit
program 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.
However, arguably if each employer in an open MEP is treated as the plan co-sponsor, there is
no commonality requirement. Additionally, an employer co-sponsor of a MEP can still take
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advantage of the fiduciary risk mitigation aspects of a MEP by delegating its fiduciary
responsibilities to the plan administrator or a lead employer sponsor. However, the duty to
monitor would continue to exist.
Tax Issue - Identity Of Plan Sponsor – Must It Be Employer Whose Employees Are Covered By
The Plan For IRS Purposes? Yes, except for a PEO plan. Authorities are Rev. Rul. 2008-45 and
Rev. Proc. 2002-21, dealing with PEO retirement plans. It probably works if the plan sponsor
adopts the plan for its employees, and other employers that become adopting employers,
although there remains the separate commonality issue under ERISA. Rev. Rul. 2008-45 ruled
that the exclusive benefit rule of Code § 401(a) is violated if the sponsorship of a qualified
retirement plan is transferred by an employer to an unrelated taxpayer and the transfer of the
sponsorship of the plan is not in connection with a transfer of business assets, operations, or
employees from the employer to the unrelated taxpayer. The Service stated that the exclusive
benefit rule is violated where the transfer by employer A of its underfunded defined benefit plan
to its wholly-owned subsidiary, B, where in exchange for assuming corporation's responsibilities
under plan, the subsidiary receives cash and marketable securities and then due to a sale of B‟s
stock to unrelated corporation C, B becomes member of unrelated employer C‟s controlled
group. The sponsorship of plan was not transferred in connection with acquisition of business.
Rather, substantially all business risks and opportunities under transaction were those associated
with transfer of plan sponsorship. Although subsidiary was an employer with respect to
employees of A while in A‟s controlled group, when the subsidiary's ownership was transferred
to unrelated corporation C, the subsidiary was no longer an employer.
Section 401(a) provides that, in order to be a qualified plan, a plan of an employer must be for
the exclusive benefit of its employees or their beneficiaries. Consistent with this exclusive
benefit rule of § 401(a), Reg. § 1.401-1(a)(2)(i) provides that a qualified pension plan is a
definite written program and arrangement which is established and maintained by an employer to
provide for the livelihood of employees or their beneficiaries after the retirement of the
employees. Similarly, Reg. § 1.401-1(a)(3)(ii) requires that a qualified plan be established by an
employer for the exclusive benefit of its employees or their beneficiaries in order to be qualified.
Section 414(a) provides that if an employer maintains a plan of a predecessor employer, then
service for such predecessor is treated as service for the employer. By its terms, § 414(a) applies
only to an “employer” and does not create employer status for a taxpayer that is not an employer.
Accordingly, when Subsidiary B no longer is a member of the Corporation A controlled group,
the plan does not satisfy the exclusive benefit rule of § 401(a) because it is not maintained by an
employer to provide retirement benefits for its employees and their beneficiaries.
Rev Proc 2002-21 deals the PEO issue where the PEO sponsors the retirement plan but
employees are sometimes if not always the common law employees of the recipient employer,
which contracts with the PEO to pay its employees and provide fringe benefits. The PEO
sponsor of a single-employer plan converts that plan into a multiple employer plan adopted by
the recipient employers whose employees participate in the plan. Rev Proc 2002-21, Sec. 5.03. If
this is done, the IRS states that the PEO plan satisfies the exclusive benefit rule. Rev Proc 200221, Sec. 4.01. However, Rev Proc 2002-21 does discuss other tax-qualification problems that are
associated with the multiple employer plan issue, i.e., it does not discuss relief with regard to
coverage, nondiscrimination, and top-heavy failures. Rev Proc 2002-21 would seem to mean that
a sponsor that converts to a multiple employer plan, each adopting employer must satisfy the
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coverage, nondiscrimination, and top-heavy test separately. Separate coverage,
nondiscrimination, and top-heavy tests would be applied to each adopting employer from their
adoption of the plan. See Reg. § 1.416-1, G-2 as to separate application of top heavy testing. If
this testing occurred and it was determined that such requirements were not satisfied, then the
revenue procedure requires that such issues must be resolved for the entire plan by the use of the
Employee Plans Compliance Resolution System (“EPCRS”). See Rev Proc 2002-21, Sec. 7.01.
Failure to do so would result in disqualification of the entire plan as to all employers.
The multiple employer retirement plan must be submitted to the IRS to receive a determination
letter after such conversion occurs. Rev Proc 2002-21, Sec. 5.03(6). A determination letter
provides reliance with regard to the tax-qualified form of the retirement plan at issue. Rev Proc
2002-6. A determination letter submission also may verify the compliance of a tax-qualified
retirement plan with the coverage rules mentioned above. Therefore, it is possible that the
determination letter requirement could provide the IRS with the opportunity to verify that a plan
converted in conformity with Rev Proc 2002-21 complies with certain tax-qualification rules
discussed above during the time period before the conversion occurred. Rev Proc 2002-21, Sec.
5.03(6). This issue of tax qualification prior to adoption of the multiple employer plan may exist
due to the unclear wording of Rev Proc 2002-21 as opposed to an intent of the IRS to enforce
retroactively any tax-qualification rules. However, again, without further guidance from the IRS,
this issue is not clear.
5500 Plan Audit Issues.
Do Savings Really Exist If Audit Done Properly? Some MEP offerings are structured as an
“unaffiliated” plan that targets employers with over 100 participants. These MEP promoters
claim that the MEP as a practical way to lower the cost of the plan‟s annual audit.
These employers, if they maintain their own plan, must include a CPA‟s audit report on the
plan‟s operation along with the Form 5500. It is not unusual for a CPA audit to cost $10,000 or
more annually. An audit is required if a plan has more than 100 participants. If there are nontraded assets in the plan, audit can be required for small plans unless additional bonding
requirements are met.
One way to achieve cost savings for the employer is to shift the cost of the audit from the
employer to the plan participants. But will the total audit cost be less with a MEP? The answer is
probably yes only if the MEP covers employees whose payroll is handled through a PEO. When
two or more employers participate in a multiple employer plan, there is only one plan to audit.
MEP promoters say that the cost to audit one plan that has, for example, three separate
employers participating in it, is less than the cost to provide three separate audits. There would
be economies for a MEP plan that involves employees of a PEO, where the PEO entity does the
payroll for all participating employers. In this case, there is only one payroll for the auditor to
test rather that looking at each separate employer‟s payroll. CPAs advise that a major cost of the
plan audit arises from testing the compensation, deferrals, and other census derived compliance
components of the plan‟s administration. Where each employer participating in the MEP does
its own payroll, there is no commonality of payroll, so it is doubtful that there are substantial
economies to an audit for such a MEP.
Additionally, a financial statement audit is composed of two components: a review of internal
controls and the audit work itself. The purpose of documenting and reviewing internal controls is
to confirm that there are sufficient controls in place over the financial activity to allow the
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auditor to rely on the financial statements prepared by management. If the controls in place are
good, all the auditor needs to do is test a limited number of transactions, confirming the controls
are in place, and then review the basis of the financial information provided. When there are no
or limited internal controls, more testing is required, resulting in higher auditor fees.
Some say that there is a MEP loophole in audit guide that sets out the rules for plan audits.
The AICPA audit guide sets out the requirements for CPAs to follow in plan audits. However,
the AICPA plan audit guideline do not discuss what is required for MEPs. Rather, it
addresses MEP welfare plans and multi-employer (collectively bargained) retirement plans but
not MEP retirement plans. Unions police the benefits they promise and that self-policing
generally results in strong internal controls over the operation of the plan. The AICPA audit
guide recognizes these controls exist and, as a result, permits the auditor to perform its testing of
the participating employer‟s data (compensation, contributions, eligibility, vesting, etc.) once
every four years. Apparently, some CPA auditors apply a similar reduced audit scope to their
MEP clients, even though there is no authority to do so.
We also spoke to an audit expert at the AICPA and were told that a CPA auditor cannot apply
the once-every-four-years audit rule for multi-employer plans to MEPs. Such an audit could also
be found to be insufficient. If that occurs, the CPA could be referred to state regulators. An
insufficient audit report filed with a Form 5500 could also result in the rejection of the form 5500
fling by the DOL. That rejection places the plan fiduciaries at risk for late filing penalties and
other participant actions.
Prohibited Transaction. There is a PT issue if the fees and expenses deducted from participants‟
accounts, or from the trust as a whole in the case of a DB plan, are not solely plan expenses, i.e.,
if they include settlor expenses, such as the cost of adopting the plan.
Employer Securities. Ownership by a MEP of participating employer securities raises numerous
issues. See http://www.klgates.com/files/Publication/2e8a6c86-83f1-429e-a82d0153b48c5480/Presentation/PublicationAttachment/1750591d-55f3-47bc-9fdf0a6b74ecffe2/BNA_Article_Multiple_Employer_Plans.pdf
Governmental MEPs. Title I of ERISA does not apply to Federal, state, or local government
plans, as it does for private employers.
A major question is to what extent the promoter can be paid from plan assets for its services.
Can it be paid for monitoring the TPA and recordkeeper to be sure each employer meets
qualification requirements, which is necessary to prevent entire plan going through EPCRS or
being disqualified. Can it be paid for selecting the mutual funds offered for the plan, which
would be a defined contribution 404(c) 401k plan, most likely a safe harbor 401k plan.
Securities Law Issues. The SEC allows association plans and collectively bargained plans due to
a nexus among the employers. One question is whether the trust fund of a multiple employer
plan is treated as an investment company under the 1940 Act. My recollection is that there are
some landmines here if investment discretion was completely centralized with one entity. Other
issues or exceptions depend on whether the entity was a regulated financial institution or the type
of investment (for example, insurance contracts).
The securities law issues may also involve section 3(a)(2) of the 1933 Act.
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