Small employers throughout the country may soon have a new option for providing cost-effective, employer-sponsored benefits to their employees.

Following an executive order via the Trump administration, both the Department of Labor (DOL) and Internal Revenue Service (IRS) have issued regulations to encourage the creation of and participation in multiple employer retirement plans (MEPs). A multiple employer plan is a "plan maintained by two or more employers who are not related" as defined by the IRS.

The DOL previously introduced a policy to alleviate restrictions on MEPs that provide health care benefits (so-called association health plans), but it was ultimately successfully challenged by a number of state governments. Similar to the prior attempt, the new regulations would override decades of sub-regulatory guidance issued by both the DOL and IRS.

Given previous events, the updated regulations have many employee benefit professionals wondering— "will the new changes face the same opposition?" Fortunately for many small employers, it doesn't appear so.

IRS Regulation

The IRS regulation aims to reverse the "one bad apple rule" that made the operation of MEPs risky for employers. This is a critical differentiator because under the one bad apple rule any uncorrected disqualifying defect by one employer-participant could put the entire plan in jeopardy. The rule understandably led to an overall hesitancy to participate in MEPs, since the employer risked penalties or excise taxes based on events and situations completely out of their control.

If the new IRS regulation takes effect, it would provide relief from this concern if the MEP adheres to certain requirements. For instance, the MEP administrator must:

• Have practices in place to ensure compliance.
• Disclose the process used in correcting any issues.
• Agree to obtain information from employer members necessary to correct any problems.

In addition, the IRS regulation requires the plan administrator to utilize a series of three notices if an employer member is out of compliance with legal requirements. If there is an issue and the employer doesn't take corrective action within a specified time period or about a year after the employer is alerted to the problem, the MEP administrator would be required to spin-off that account into a separate, single employer plan. The employer would take responsibility for compliance and administration associated with that single plan, while all remaining participating employers in the MEP would not be impacted or penalized.

DOL Regulation

The DOL's regulations focus on the types of organizations that can legally act as MEP plan administrators. Although the guidelines have yet to be finalized and could still be subject to revision, the regulations would change the rules surrounding the establishment of two types of entities that can act as plan sponsors—professional employer organizations (PEOs) and bona fide groups or associations of employers.

Essentially, a PEO is an entity that outsources much of the employment function for employers. The PEO may be structured to act as a "co-employer" with the operating company that utilizes its services in the course of its business. In order to operate as a PEO under the DOL regulation, the PEO must:

• Perform "substantial" employment functions on behalf of its client. (Please note, this does not necessarily mean that the PEO is the employer for other purposes, including IRS or the Fair Labor Standards Act).
• Operate as plan sponsor and plan administrator of the MEP and be the "named fiduciary" as described in the Employment Retirement Income Security Act (ERISA).
• Ensure that each client has at least one employee participant in the MEP.
• Limit participation in the plan to employees and former employees of clients plus their beneficiaries.

Additionally, the new DOL regulations attempt to lower the barrier to entry and liberalize the requirements for employers to qualify as a "bona fide employer organization." Prior to the DOL regulation, bona fide employer organizations were permitted to sponsor a single plan under ERISA, but the requirements to qualify as a bona fide organization were very difficult to meet.

Under the new guidelines, an organization must meet the below criteria in order to be considered a bona fide employer organization.

• Have a formal organizational structure, which can include bylaws or a specific governing body.
• Be controlled by its employer members.
• Have some business purpose other than the provision of employee benefits.
• Limit participation in the MEP to employees and former employees of clients and their beneficiaries.
• Ensure that each employer member has at least one employee participant in the MEP.
• Limit membership in the organization to employers with some nexus or commonality of interest.

While final guidance has yet to be issued by the DOL on the above regulation, and the IRS regulation is not yet effective, both create an exciting, new possibility for smaller organizations to offer employees superior, cost-effective retirement benefits. Benefit professionals should review this opportunity with their clients to determine whether this new option presents an opportunity for them.

L. Stephen Bowers, counsel at White and Williams in Philadelphia, serves a broad array of corporate clients and has notable experience guiding employers of all types, including private companies, government entities, nonprofits and educational institutions through industry-specific employee compensation and benefits rules. Contact him at [email protected].