DOL Criteria for Treating a MEP as “Closed”
A blog by Pete Swisher, CFP, CPC, Senior Vice President – April 28, 2015
In Department of Labor (DOL) Advisory Opinion 2012-04A, the Department set forth six criteria as their framework for evaluating whether a multiple employer plan (MEP) can be treated as a “closed MEP”—the industry term that has evolved to describe a MEP that is a single plan for ERISA purposes. “Open MEPs,” by contrast, are single plans under the Internal Revenue Code (IRC) but the ERISA compliance work is done differently—with separate audits, bonds, and Form 5500s for each adopting employer. The advantage of the “closed” structure is that the arrangement has only a single audit, bond, and 5500.
Simplistically, a “closed” MEP is only open to employers who share common interests and/or organizational relationships beyond the provision of benefits. “Open” MEPs can be open to any employer who wants to join.The Six Criteria
How does a MEP qualify as “closed”? Here are the six criteria the DOL says it examines to determine whether a “group or association of employers” would meet the ERISA definitions of “employer” and “plan sponsor” and therefore be a “bona fide” group or association :
- Solicitation. “…How members are solicited…”
- Eligibility. “…who is entitled to participate and who actually participates in the association…”
- Process for Forming. “…the process by which the association was formed, the purposes for which it was formed, and what, if any, were the pre-existing relationships of its members…”
- Rights of Members. “…the powers, rights, and privileges of employer members that exist by reason of their status as employers…”
- Control. “…who actually controls and directs the activities and operations of the benefit program. 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.”
- Nexus. “…in the absence of any genuine organizational relationship between the employers, no employer group or association exists for purposes of ERISA section 3(5)…”
- “…employment based common nexus or other genuine organizational relationship that is unrelated to the provision of benefits…”
- “…(“the entity that maintains the plan and the individuals that benefit from the plan [must be] tied by a common economic or representation interest, unrelated to the provision of benefits.”)…” from case la
- “…established judicial view that the person or group maintaining an “employee benefit plan” under ERISA must be tied to the employees or the contributing employers by genuine economic or representational interests unrelated to the provision of benefits…”
- “…(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 an employee welfare benefit plan”)…”
- “…participation agreements that label the signatory employers as co-sponsors of a plan do not change this conclusion…”
What Sorts Of Groups Can Start “Closed” MEPS?
Every case is different and the facts and circumstances determine whether a MEP can/should be treated as a single plan for both ERISA and IRC purposes, but the following examples should help clarify. But take care: just because an organization MIGHT qualify to sponsor a closed MEP does not make such treatment automatic; structuring the program properly is imperative.
- Likely to Have the Ability to Qualify as “Closed” if Structured Properly:
- Long-standing associations whose members are very similar (e.g., members of a particular trade, perhaps within a specific geographic region)
- Employers related by common ownership (but not sufficiently 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)
- Professional Employer Organizations (but beware; this is an open question—most PEO plans are today being treated as “closed” MEPs, but this has not yet been tested with the DOL)
- Unlikely to Qualify as “Closed”
- Chambers of Commerce and other business groups with broad membership
- Payroll service providers who are not PEOs
- Associations with broad membership among different industries whose members are otherwise unrelated
- Plans created by financial advisors and service providers or their clients without being tied to one of the likely “closed” types of organizations above.
What Should A Group Do If It Does Not Qualify For “Closed” MEP Status?
Do an “open” MEP instead. Just make sure you honor the DOL’s position that “open” MEPs are not single plans under ERISA, and do the compliance work accordingly—with separate audits, bonds, and Form 5500 filings for each adopter. There is a long list of economies of scale a MEP offers, and having to do separate audits, bonds, and 5500s barely dents the list. And in many cases an “open” MEP is actually more advantageous than a “closed” MEP due to the demographics of the adopting employers. But as with any MEP, be sure to structure it properly.
For more information on the legal and regulatory issues surrounding “open” MEPs and the DOL’s position on them, see Pentegra’s Stance on Open MEPs.
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