The Department of Labor (“DOL") in Advisory Opinion 2012-04A, addressed whether a 401(k) plan sponsored by one employer can be adopted by other unrelated employers and qualify as a “multiple employer pension plan" (“MEP") under ERISA.
The program is typical of ones offered to smaller employers by private organizations, including certain insurers and financial institutions. These plans are designed to help employers save on compliance costs by allowing them to file a single Form 5500 report on behalf of the plan, providing for unified plan administration and limiting individual employers’ fiduciary responsibilities. By consolidating compliance in one plan, such plans relieve employers of many of the compliance costs normally associated with sponsoring an individually designed or master or prototype (“M&P") plan.
Both individually designed and M&P plans require employers to comply with ERISA’s reporting and disclosure rules but to follow appropriate formalities in adopting plan amendments and to apply for IRS determination letters. In addition, employer that sponsors an individually designed qualified retirement plan is separately subject to ERISA’s reporting and disclosure, prohibited transaction, fidelity bond and fiduciary duty rules.
The Opinion was written in response to a request for guidance regarding the application of Title I of ERISA to a retirement savings program operated by 401(k) Advantage LLC (“Advantage"). The applicant asked whether the program would qualify as a single “employeepension benefit plan" under ERISA if multiple unrelatedemployers adopted the Plan.
The Plan was designed to be a single “multiple employer" 401(k) profit-sharing plan coveringemployees of Advantage as well as employees of other unrelated employers that adoptthe Plan. The Plan’s participation agreement described each adopting employer as acting “directly as an employer" and as a “co-sponsor" of the Plan. The Plan covered more than 500 unrelated adopting employers.
Advantage signed the plan’s Forms 5500 as “plan sponsor" and was the Plan’s “named fiduciary" under ERISA. Advantage asserted that, as named fiduciary, it “assumes the risk and liability associated with the trustee role and removes every adopting employer from the liability associated with that role." In 2010, according to the Plan’s Form 5500, it had almost 10,000 participants and $63 million in assets.
The Plan maintained a plan document covering participating employers. Where a labor union joined the Plan, the Plan would cover employees of any employer who was a party to a collective bargaining agreement with the union.
The participation agreement required employers to delegate to another company, TAG, as having the “full responsibility of Plan Administrator." TAG’s duties included resolving beneficiary disputes, interpreting the Plan’s terms, completing audited financial statements, and appointing investment advisors and managers. Each employer had to state that it had “independently exercised its fiduciary judgment in selecting this plan and . . . the offering of investment contracts and funds." Employers also had to acknowledge their fiduciary responsibility to periodically review the performance of TAG as investment manager and to periodically determine whether to continue the arrangement.
The agreement stated that anemployer’s obligation to review its delegation of authority extends “only to the portion of the plan which covers its own employees." Employers also had to acknowledge that Advantage, as Plan sponsor, had sole authority over the Plan document, including the right to amend or restate the Plan. T Advantage and TAG hadright to terminate any employer’s participation in the Plan. Employers could withdraw by giving 60 days’ written notice. If an employer withdrew, the Plan’s assets, liabilities and contracts allocable to that employer would be “spun off into a single employer plan, with the employer as plan sponsor and the person who signed the participation agreement becoming the trustee of the new plan. Each employer agreed to pay a monthly fee for administration and recordkeeping services, which would be deducted from plan assets.
The Department of Labor noted that defines the term “plan sponsor" as (i) the employer in the case of an plan established or maintained by a single employer, (ii) the union organization in the case of a plan established or maintained by a union, or (iii) for a plan established or maintained by two or more employers or jointly by one or more employers and one or more unions, the association, committee, joint board of trustees, or other representatives of the parties who maintain the plan.
DOL noted that, although the Advantage Plan provided the type of benefits normally associated with an “employee pension benefit plan" under ERISA, but the plan was not maintained by an “employee organization"within the meaning of ERISA. The DOL also noted that nothing in the plan documents indicated that “employees" participate in Advantage (the plan sponsor) or TAG (the plan administrator). The ruling also found that membership or ownership of Advantage or TAG was not conditioned upon an individual’s being an employee of either entity. The DOL therefore determined that the Plan was not sponsored by an “employee organization."
DOL further noted that, although the documents described Advantage as the plan sponsor, as a factual matter,it did not actas an “employer" under ERISA. Although some Advantage employees were Plan participants, Advantage had no direct employment relationship with the vast majority of participants. The DOL therefore concluded that Advantage was not be acting as an “employer" under ERISA.
The DOL further noted that, although neither Advantage nor any other entity involved in the Plan’s administration or operation qualified as an employer association under ERISA.
DOL noted that employers that participate in a benefit program must, either directly or indirectly, exercise control over the program, both in form and substance to be a bona fide employer group or association. DOL therefore concluded that the plan at issue was not sponsored by a bona fide association or group of employers. The DOL stated that where unrelated employers merely execute identically worded trust agreements or similar documents to fund or provide benefits, without a genuine organizational relationship between the employers, no employer group or association exists.
In concluding that neither Advantage nor TAG was an “employer" or an “employee association, and that that there was no employment-related common bond between the various employers or between individual employers and Advantage or TAG. Rather, Advantage and TAG acted as service providers, such as a TPA or investment advisor. The lack of an employment-related tie between the two companies and adopting employers, meant that neither organization could sponsor a multiple employer plan under ERISA.
The ruling therefore concluded that the plan was not amultiple employer plan under ERISA. Rather it was merely an arrangement under which each employer establishes and maintains a separate plan for its own employees.
The Opinion raises the possibility that certain programs marketed as multiple employer plans will fail to qualify as such under ERISA. This will be the case where a company is established principally to sponsor a benefit plan designed to be adopted by unrelated employers.
Employers considering joining such plans should be careful to make certain that the plan qualifies as a “multiple employer plan" under ERISA. Plans for a group or industry, for example, a plan sponsored by a medical association for a group of doctors or medical companies, should not be adversely affected by this ruling since, in that case, there would be the required employment-related common bond between the adopting employers. Similarly, plans sponsored by a trade organization for employers within its trade or craft should be able to qualify as multiple employer plans. Where the employment related common bond between employers is loose or nonexistent, however, it is likely that DOL will rule that the plan does not meet the requirements of a “multiple employer plan" (MEP). In that case, all of the adopting employers would have to satisfy the requirements of ERISA on an employer-by-employer basis.