Industry & Regulatory News

OMB to Review Proposed DOL Guidance on Retirement Plan Disclosures

The Office of Management and Budget (OMB) has received for review Department of Labor (DOL) new proposed regulations on procedures for satisfying retirement plan disclosure requirements. These regulations are the DOL’s response to an Executive Order issued by President Trump in August 2018, in which the President asked the agency to seek regulatory means of simplifying compliance with retirement plan disclosure obligations.

Based on comments attributed to DOL sources, many expect these regulations to address the potential for greater use of electronic delivery of required plan disclosures, something that has been a longstanding initiative of retirement plan service providers.

While no legal deadline for completing review of this guidance is noted in the OMB website posting, it is generally expected that OMB’s review would be completed within 30–90 days, after which the guidance will be published in the Federal Register.


IRS Publishes Corrections to MEP “Bad Apple” Proposed Regulations

Several corrections to IRS proposed regulations on multiple employer plans (MEPs) were published in the Federal Register. Originally published on July 3, 2019, this proposed guidance would revise 1979 IRS final regulations on MEPs—arrangements under which several employers elect to participate in a common plan.

A key revision being proposed in these regulations addresses the so-called “bad apple” rule, under which an entire MEP could fail to meet qualification requirements because of a compliance failure by one employer. This is known formally as the “unified plan rule.” These regulations propose an exception to the unified plan rule and—if certain requirements are met—compliance failures by individual participating employers need not jeopardize the entire MEP.

Most of the corrections published in the Federal Register are of a grammatical or punctuation nature, or a minor omission, such as failing to precede an Internal Revenue Code citation with the word “Section.” However, one substantive change corrects an omission in the preamble (page 31788) to these proposed regulations. Added by the correction is the parenthetical reference “(and their beneficiaries”) to a proposed notification requirement.

Specifically—in the event of a compliance failure by a participating MEP employer—a notification must be sent by the MEP plan administrator to participants if that participating employer has proven unresponsive. The proposed regulation states that such notices must be provided to beneficiaries, as well. However, the preamble as published did not include a reference to beneficiaries. The correction now being made aligns the preamble with the regulation itself.


OMB to Review Proposal to Revise RMD and Beneficiary Life Expectancy Tables

The Office of Management and Budget (OMB) has received for review proposed Treasury/IRS regulations that would update life expectancy and distribution period tables used when calculating required minimum distributions (RMDs) from retirement savings arrangements, including required distributions to beneficiaries. According to its website, the OMB reviewed the proposal on August 13. While no legal deadline for completing review of the guidance is listed, it is generally expected that OMB’s review would be completed within 60–90 days, after which the guidance would be expected to be published in the Federal Register.

This proposed update to the life expectancy and distribution period tables is in response to an Executive Order issued by President Trump in August 2018. In that Executive Order, the President directed the Treasury Department and the Department of Labor to seek regulatory avenues for enhancing retirement saving opportunities. Specifically recommended were updating the above-described distribution tables to reflect longer life expectancies (tables last updated in 2002), enhancing opportunities for employers to participate in multiple employer plans (MEPs), and simplifying retirement plan disclosure processes.


IRS Guidance Addresses Retirement Plan UnCashed Check Withholding, Reporting

The IRS has issued Revenue Ruling 2019-19, which addresses the responsibilities of retirement plan administrators when a distribution check that represents a taxable amount is issued to a plan participant, but remains uncashed. The facts and circumstances described in the guidance define the distribution as not including designated Roth account (e.g., Roth 401(k)) amounts—which are potentially tax-exempt—or other amounts not subject to normal taxation.

The guidance notes the following.

  • The check amount is taxable in the year received by the recipient, whether cashed or not.
  • Plan administrator obligations for withholding—and remitting of withholding—are not altered by whether the check is cashed.
  • The recipient’s failure to cash the check does not alter the plan administrator’s requirement to report the distribution on IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. (reporting is required for distributions of $10 or more).

Senator Introduces “Automatic IRA Act of 2019”

Congress may be officially in recess, but bills continue to appear during the state and district work period for senators and representatives. Sen. Sheldon Whitehouse (D-RI) has introduced the Automatic IRA Act of 2019 (S. 2370). The legislation would mandate that most employers that do not offer their employees another type of retirement plan, establish an automatic enrollment, payroll deduction program with contributions withheld from employee pay and contributed to an IRA or retirement bond. The legislation is intended to address the lack of a workplace retirement savings program for many private sector employees. Estimates vary, but suggest that between 33 and 40 percent of this workforce has no workplace plan.

Much more comprehensive retirement legislation has already been passed this year by the U.S. House of Representatives—the Setting Every Community Up for Retirement Security (SECURE) Act—and is pending in the Senate. Nevertheless, this legislation too will be monitored when Congress returns in September for the remainder of the 2019 session.

Provisions

In many respects, S. 2370 resembles automatic enrollment IRA legislation introduced in several prior sessions of Congress by fellow Democrat Richard Neal (D-MA), the House Ways and Means Committee Chairman. It contains the following provisions.

  • Most employers that do not offer a retirement plan, and had more than 10 employees earning at least $5,000 in the preceding calendar year, would be required to offer a “qualifying automatic IRA arrangement.” Also exempt would be certain new businesses, government entities, and churches.
  • Employers with existing retirement plans that are frozen, have had no contributions for three plan years, or provide only discretionary contributions, would not be exempt by virtue of maintaining such plans.
  • In general, employers that are required to participate in a qualifying state-facilitated retirement program for private sector workers would not be required to establish this federal automatic IRA plan.
  • The employees of multi-state employers would be covered under the rules of respective qualifying state-facilitated programs, or under the federal program in the case of a state with no such program. Such multi-state employers could instead irrevocably elect to have their employees in all states covered under the federal program.
  • Qualifying state programs could be multi-state consortiums.
  • As an alternative to automatically enrolling all eligible employees, an employer could request affirmative elections to contribute, but automatically enroll those who do not make an election.
  • Certain employees need not be covered under such an arrangement, including those under age 18, those who have worked less than three (3) months for the employer, certain collectively-bargained or nonresident alien employees, and—in the case of certain employers that operate an exempting plan—employees that have not yet met eligibility requirements to participate in that employer’s 403(b), SEP, or SIMPLE IRA plan.
  • A $100 penalty would be imposed on a covered employer for each otherwise eligible employee not enrolled, unless due to reasonable cause and corrected within 90 days.
  • Amounts withheld and contributed under the automatic IRA program would be at a rate of three percent of compensation, or other initial percentage as specified in future regulations by the Secretary of the Treasury, but not less than two percent or greater than six percent.
  • Amounts withheld would be invested in a Roth IRA or Traditional IRA; Roth IRA unless otherwise elected.
  • The Secretary of the Treasury may issue regulations providing for automatic deferral increases.
  • Automatically withheld amounts would be required to be placed in certain classes of investments, including target date or life cycle funds, principal preservation funds, guaranteed lifetime income investments, a qualifying retirement bond, or “certain other funds determined by the Secretary.”
  • Such automatic IRA arrangements would not be considered ERISA-governed pension plans if the Act’s provisions are met.
  • Employees who elect-out of the arrangement and have automatic IRA contributions distributed to them within 90 days would not be subject to the 10 percent early distribution penalty tax.
  • Automatic IRA contributions would be required to be remitted by the last day of the month following the month of withholding, or if later, by a deadline prescribed under Treasury regulations, but in no case later than the deadline for income tax withholding for the period. Fiduciary liability would apply for failure to meet this requirement.
  • Notice and election period requirements would apply, generally including notification at least 30 days before the beginning of a year, or 30 days before an employee becomes eligible.
  • An annual account statement would be required, much like all IRAs.
  • In general, all IRA rules would apply.
  • Small employers (100 or fewer employees) could be eligible for a tax credit for maintaining an automatic enrollment IRA arrangement for up to six years; to a maximum of $750 for the first year, and a maximum of $500 for the following years.
  • The small employer retirement plan start-up credit would increase from a current maximum of $500 per year to a maximum of $5,000.
  • Any state laws in conflict with H.R. 2035’s provisions would be preempted.
  • The effective date, in general, would be 2021 and later years.

 

 


Washington Pulse: Final Regulations Expand MEP Options

In 2018, roughly 38 million private-sector employees did not have access to a retirement plan*. This troubling statistic led the Trump Administration to issue an Executive Order, directing the Department of Labor (DOL) and the Treasury Department to issue guidance that would help increase participation levels in employer-sponsored retirement plans.

On July 31, 2019, the DOL fulfilled this directive by releasing final regulations on association retirement plans (ARPs)—also known as multiple employer plans, or MEPs. A MEP typically allows multiple employers to participate in a single retirement plan, which may—among other things—help reduce plan administrative and fiduciary responsibilities for participating employers. The final regulations are substantially similar to the proposed regulations, which were covered in detail in a previous Washington Pulse.

 

Why the Final Regulations are Important

One of the most important outcomes of the final regulations is the expanded interpretation of the term “employer.” The current definition of “employer” under ERISA Section 3(5) is unclear because the term “group or association of employers” is not defined. As a result, many in the retirement industry have relied on various DOL advisory opinions that seemed unnecessarily narrow.

The final regulations clarify that a “bona fide group or association of employers,” and a “bona fide professional employer organization” that satisfy certain criteria are deemed to be able to act in the interest of an employer for MEP purposes. Although the final regulations expand the term “employer,” the guidance does not create “open MEPs,” under which multiple participating employers share no common characteristic, affiliation, or purpose (as has been proposed in pending legislation).

 

Commonality of Interest Requirement Remains

To qualify as a “bona fide group or association of employers,” the group or association of employers must meet seven requirements—one of which is the “commonality of interest” requirement. To meet this requirement, the employers within the group or association must

  • be in the same industry, trade, line-of-business, or profession; or
  • have a business in the same region.

The DOL is taking a “middle-of-the-road” approach toward expanding or restricting the commonality requirement. Responding to the proposed regulations, some commenters asked the DOL to impose a less restrictive test by eliminating the commonality of interest requirement. The elimination of this requirement would essentially allow groups or associations of employers to form open MEPs. The DOL, however, decided to keep the commonality of interest requirement. Although this provision is not required by statute, the DOL believes that keeping this requirement is important for several reasons—one of which is that it aligns the final ARP regulations with the final association health plan (AHP) regulations.

In the preamble to the final ARP regulations, the DOL stated that it would “construe[ ] broadly” what constitutes an industry, trade, line-of-business, or profession. The DOL believes that this broad interpretation will help expand access to MEPs. The DOL also indicated that, in general, it will not challenge

  • any “reasonable and good faith” industry classification or categorization of employers, or
  • the inclusion of businesses that share an economic or representational interest with other members of the group or association.

 

Special Rules for Owner-Employees

The 2018 Executive Order directed the DOL to consider how working owners (e.g., sole proprietors without employees) might be included in MEP arrangements. The final regulations clarify that working owners without common law employees may consider themselves to be both an employer and an employee, and therefore eligible to participate in a MEP. To qualify for MEP participation, an owner-employee must 1) have an ownership interest in the trade or business, 2) have income from providing personal services to the trade or business, and 3) meet minimum work hours or earnings tests.

 

New PEO Requirements
Under the final regulations, a professional employer organization (PEO) must meet four requirements in order to qualify as a “bona fide PEO.” A bona fide PEO may act as an “employer” for purposes of sponsoring a MEP that covers the employees of its client employers. To qualify as a bona fide PEO, a PEO must

  • perform substantial employment functions for its client employers;
  • have substantial control over the MEP’s functions and activities and continue to have employee-benefit-plan obligations to MEP participants after the contract between the PEO and its client employers ends;
  • ensure that each client employer has at least one participant covered under the MEP; and
  • limit MEP participation only to current and former employees of the PEO and the PEO’s client employers, to former client employers, and to beneficiaries.

Whether a PEO performs “substantial employment functions” on behalf of its client employers is generally based on the facts and circumstances. But PEOs needing more regulatory certainty can take advantage of a new safe harbor, which is separate from the facts-and-circumstances test. (The proposed regulations contained a complicated regimen of safe harbors; the final regulations contain a single, simplified safe harbor with four conditions that PEOs must meet.)

 

Miscellaneous Provisions

 

Severability Provision Provides Safety Net
The final ARP regulations include a severability clause. Under this clause, if any provisions are found to be unenforceable, or stayed by court action, the remaining provisions of the regulations would remain operative and enforceable. (The regulations include examples of how this severability provision would be applied.)

The severability clause is similar to the one found in the final AHP regulations, which were released in June 2018. Since then, the final AHP regulations have encountered legal obstacles—including having certain provisions vacated by the U.S. District Court for the District of Columbia. Whether the ARP guidance generates similar concerns remains to be seen.

 

States Can Still Establish MEPs

The DOL received numerous comments questioning how the final regulations would affect other guidance—including DOL Interpretive Bulletin 2015-02, which gives states the authority to establish state-facilitated MEPs. The DOL clarified that, although the final regulations do supersede other preexisting DOL guidance, the regulations do not supersede this interpretive bulletin.

 

Open MEPs Still a Possibility

Although the final regulations don’t allow for open MEPs, the DOL has not ruled out future rulemaking that may permit them. Following the release of the proposed regulations, the DOL received approximately 60 comments; more than half of those comments addressed this issue, and the majority supported the creation of open MEPs or pooled employer plans.

Because of the comments received, the DOL has issued a request for information (RFI) that asks for responses on several questions addressing such issues as 1) the cost and complexity of open MEPs, 2) whether the DOL should allow financial institutions to sponsor open MEPs for unrelated employers, and 3) whether the DOL should expand its regulatory definition of employer to include “corporate MEPs” and affiliated service groups.

Although not officially defined, a corporate MEP typically consists of a plan that covers a group of employers related by some level of common ownership—but not enough ownership to constitute a controlled group or affiliated service group. There were three reasons the DOL included corporate MEP questions in the RFI.

  • To obtain information on the level of common ownership that would indicate enough genuine interests to permit members to act in the interests of other group members for purposes of sponsoring a MEP.
  • To determine whether the DOL should consider other facts and circumstances in addition to the level of common ownership between employers.
  • To determine what criteria two or more tax-exempt organizations or a tax-exempt organization and another organization must meet to be considered an employer under ERISA Section 3(5).

 

No Additional Reporting Requirements

The proposed regulations solicited comments on whether it should modify the current reporting and disclosure requirements. Because of the comments received, the DOL decided not to modify the current reporting and disclosure requirements. It also clarified that the MEP plan administrator is responsible for meeting these requirements.

 

The Pros and Cons of Joining a MEP

Some employers may benefit from joining a MEP—especially smaller employers that may not have the time or money to offer their own retirement plan. For example, participating employers may benefit by delegating plan duties to the MEP plan sponsor, incurring less fiduciary liability and sharing reporting responsibilities. But MEPs may not provide a substantial benefit to all who join. For example, proponents claim that participating employers could file one Form 5500 information return collectively. While this is true, many small employers don’t have to file this form, so this benefit could be minimal at best. Cost savings is another commonly perceived benefit. But because plan administration fees and investment fees have lessened in recent years, employers may not incur substantial cost savings after joining a MEP.

 

More to Come . . .

This year has seen a substantial increase in MEP-related activity. In addition to the DOL’s final regulations, the IRS released proposed regulations eliminating the “one bad apple rule,” which would provide an important improvement for MEPs. And earlier this year the U.S. House of Representatives passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. If enacted, this proposed legislation would eliminate the current commonality requirement—resulting in open MEPs.

While the final ARP regulations may not go as far as some in the industry would like, the regulations do give employers participating in MEPs more certainty about their status under ERISA. And based on the information contained in the RFI, it appears that the DOL is at least preparing for the possibility of open MEPs sometime in the future.

The final ARP regulations are effective September 30, 2019. Those looking for additional information may refer to the DOL’s fact sheet. And, as always, visit ascensus.com for any new developments.

* “National Compensation Survey: Employee Benefits in the United States”, The U.S. Department of Labor’s Employee Benefits Security Administration, March 2018

 

Click here for a printable version of this edition of the Washington Pulse.


Service Provider’s Auto-Portability Proposal Receives DOL Blessing

The Department of Labor’s Employee Benefit Security Administration (EBSA) has published in the Federal Register a prohibited transaction exemption (PTE) granted to a service provider that has proposed what it describes as an automatic portability program for retirement plan assets.

This exemption—PTE 2019-02—was considered necessary so that Retirement Clearinghouse (RCH) could receive fee compensation in connection with the services it intends to provide in this automatic portability program. In general, receipt of such fees would be considered a prohibited transaction, but the EBSA will approve individual applications for exemptions when they meet certain criteria. PTE 2019-02 is granted to RCH for a period of five years.

The RCH program contains essentially two elements.

  • Based on agreements between RCH, participating employer plans, and participating third-party recordkeepers, certain retirement plan small balance cash-out amounts and terminating plan accounts would be automatically rolled over to an “RCH default IRA,” or to a “default IRA” of a participating recordkeeper; this would occur unless the plan participant affirmatively elected otherwise.
  • Subsequently, RCH would—by means of data matching searches—determine whether the IRA owner is participating in another employer plan that accepts rollovers. If the default IRA owner does not affirmatively consent or object, the IRA balance would be automatically rolled over to that new employer’s plan.

 

Process Began With EBSA Advisory Opinion

In November 2018, RCH applied to EBSA for an advisory opinion that would address not the receipt of fees, but instead asked EBSA to address the fiduciary status of RCH and other parties to the auto-rollover program.

The EBSA answered RCH’s inquiry on fiduciary status in Advisory Opinion 2018-01A, published in the November 5, 2018, Federal Register. EBSA simultaneously published in the Federal Register a notice of proposed prohibited transaction exemption (PTE), and invited comments on this PTE request, which it accepted through December 24, 2018.

In its granting of PTE 2019-02 now to RCH, the EBSA noted that there were several commenters who objected to an exemption, these stating that there are multiple reasons why such asset transfers should be done only as affirmative actions on the part of an account owner.

In explaining its decision to grant PTE 2019-02, the EBSA noted that its regulations permit fiduciaries to transfer small account balances to default IRAs “only if protective conditions are met,” and that the exemption now being granted contains “additional conditions applicable for [such] transfers … under the RCH program.”

PTE 2019-02 also prescribes the following.

  • A plan fiduciary that is independent of RCH must review the terms of the RCH program and determine, consistent with its duties under Section 404 of ERISA, that the plan’s participation in the RCH program is prudent.
  • All fees must be approved by the responsible plan fiduciary of the old employer plan.
  • RCH has no authority to unilaterally change these fees, and all fees under the RCH program must not exceed reasonable compensation.

Congressmen Introduce “IRA Preservation Act of 2019”

Although members of the House of Representatives have officially begun their annual August recess, among bills that have recently been introduced and referred to committee is H.R. 4117, the “IRA Preservation Act of 2019.” Its chief co-sponsors are Reps. Ron Kind (D-WI) and Mike Kelly (R-PA). The bill’s main thrust is expanding the IRS Employee Plans Compliance Resolution System (EPCRS) to cover certain errors under individual retirement plans, and providing for reduced penalties for certain self-corrections.

The bill has been referred to the House Ways and Means Committee.  The House of Representatives’ 2019 session resumes on September 9.

Key provisions of H.R. 4117—based on bill text provided by Rep. Kind’s office—include the following.

  • Require the Treasury Department to provide public education materials on IRA contribution and deduction limits, rollovers, required minimum distributions (RMDs), prohibited transactions, the 10 percent early distribution excise tax, and common IRA errors.
  • Reduce the IRA excess contribution penalty from six percent to three percent if corrected within a specified time window.
  • Reduce the penalty for failure to fully distribute an RMD from 50 percent to 10 percent of the undistributed amount if corrected within a specified time window (no reference is made to the existing procedure by which a full waiver of this penalty can be obtained).
  • Exempt earnings withdrawn in a timely IRA excess contribution correction from the 10 percent excise tax on early distributions (which generally applies to those under age 59½)
  • Eliminate the IRA prohibited transaction (PT) consequence of complete IRA disqualification; H.R. 4117 would apply the same rule to HSA, Archer MSA, and Coverdell ESA PTs.
  • Liability for an IRA, HSA, MSA, or ESA PT would be the general 15 percent (primary) and 100 percent (secondary) tax on the PT amount, unless the infraction is a pledging of assets within the account, in which case—while no excise tax—the pledged portion of the account would be deemed distributed and subject to normal taxation consequences.
  • A three-year statute of limitations on PT tax liability would apply.
  • Expand the IRS’s EPCRS program to allow IRA custodians, trustees, and issuers to self-correct errors “for which the owner of an IRA was not at fault;” to include, “but not limited to,” failure to complete a rollover within 60 days, and allow indirect rollover by a nonspouse beneficiary who had reason to believe that due to service provider error, an indirect rollover was permissible.
  • Permit self-correction of “inadvertent” RMD failures in retirement plans (those subject to EPCRS) and IRAs—presuming the existence of practices and procedures designed to prevent such failure—within 180 days; for an IRA owner, “inadvertent” to mean “due to reasonable cause.”
  • The effective date, in general, is as of the date of enactment, with transition provisions; the education elements required of the Treasury Department are to occur “as soon as reasonably practicable after the enactment,” but no later than one year following the date of enactment.

 

 


Association Retirement Plan (a.k.a. MEP) Final Regulations and RFI in Today’s Federal Register

Today’s Federal Register contains the Department of Labor (DOL) final regulations and a Request for Information pertaining to association retirement plans, also known as multiple employer plans (MEPs).

The final regulations provide guidelines under which more than one employer may be treated as a single employer for purposes of retirement plan participation. An important objective of such arrangements is the sharing of plan administration responsibilities and, potentially, costs, for a retirement plan that covers eligible employees of the participating employers.

The guidance does not create or legitimize so-called “open MEPs,” under which multiple participating employers share no common characteristic, affiliation, or purpose (as has been proposed in pending legislation). But this guidance—a response to an August 2018 Executive Order issued by President Trump—would broaden the circumstances under which MEP formation could take place.

Final regulations on association health plans were previously published and have encountered legal obstacles. Whether there will be similar issues with this association retirement plan guidance remains to be seen.

In this guidance the DOL states that “expanding access to workplace retirement plans is critical to helping more American workers financially prepare to retire.” Like the proposed regulations, this guidance applies only to defined contribution retirement plans. The final regulations have no superseding effect on DOL Interpretive Bulletin 2015-02, which gave states the authority to establish state-facilitated MEPs.

The final regulations are substantially similar to the proposed regulations. Highlights include the following.

Bona Fide PEO

The final regulations (like the proposed) include four requirements for a professional employer organization (PEO) to qualify as a “bona fide” PEO that may act as an “employer” under ERISA Section 3(5) for purposes of sponsoring a MEP covering the employees of client employers. One of these four requirements requires the PEO to perform “substantial employment functions” on behalf of the client employers.

Whether a PEO performs “substantial employment functions” on behalf of its client employers is generally determined based on facts and circumstances. But in an effort to provide regulatory certainty, the final regulations contain a safe harbor separate from the facts-and-circumstances test. This safe harbor has been simplified in the final rule.

The final rule contains only one safe harbor for all PEOs. Instead of nine criteria, the new safe harbor contains only four criteria. And instead of allowing a PEO the choice of selecting five from among the nine criteria, the new safe harbor requires that the PEO satisfy all four criteria.

Severability

The final regulations include a severability provision, which provides that if any of the provisions are found to be unenforceable, or stayed by court action—pending further agency action—the remaining provisions of the regulations would remain operative and available. (The regulations include examples of how this severability provision would be applied.)

 


DOL Issues Association Retirement Plan (a.k.a. MEP) Final Regulations

Scheduled for publication in the Federal Register this week are Department of Labor (DOL) final regulations on association retirement plans, a name that in very general terms equates to multiple employer plans, or MEPs. In addition to the final regulations, the DOL has issued a companion request-for-information document, “Open MEPs” and Other Issues.

The final regulations provide guidelines under which more than one employer may be treated as a single employer for purposes of retirement plan participation. An important objective of such arrangements is the sharing of plan administration responsibilities and, potentially, costs, for a retirement plan that covers eligible employees of the participating employers.

The guidance does not create or legitimize so-called “open MEPs,” under which multiple participating employers share no common characteristic, affiliation, or purpose (as has been proposed in pending legislation). But this guidance—a response to an August 2018 Executive Order issued by President Trump—would broaden the circumstances under which MEP formation could take place.

Final regulations on association health plans were previously published and have encountered legal obstacles. Whether there will be similar issues with this association retirement plan guidance remains to be seen.

In this guidance the DOL states that “expanding access to workplace retirement plans is critical to helping more American workers financially prepare to retire.” Like the proposed regulations, this guidance applies only to defined contribution retirement plans. The final regulations have no superseding effect on DOL Interpretive Bulletin 2015-02, which gave states the authority to establish state-facilitated MEPs.

The final regulations are substantially similar to the proposed regulations. Highlights include the following.

Bona Fide PEO

The final regulations (like the proposed) include four requirements for a professional employer organization (PEO) to qualify as a “bona fide” PEO that may act as an “employer” under ERISA Section 3(5) for purposes of sponsoring a MEP covering the employees of client employers. One of these four requirements requires the PEO to perform “substantial employment functions” on behalf of the client employers.

Whether a PEO performs “substantial employment functions” on behalf of its client employers is generally determined based on facts and circumstances. But in an effort to provide regulatory certainty, the final regulations contain a safe harbor separate from the facts-and-circumstances test. This safe harbor has been simplified in the final rule.

The final rule contains only one safe harbor for all PEOs. Instead of nine criteria, the new safe harbor contains only four criteria. And instead of allowing a PEO the choice of selecting five from among the nine criteria, the new safe harbor requires that the PEO satisfy all four criteria.

Severability

The final regulations include a severability provision, which provides that if any of the provisions are found to be unenforceable, or stayed by court action—pending further agency action—the remaining provisions of the regulations would remain operative and available. (The regulations include examples of how this severability provision would be applied.)