``Open MEPs'' and Other Issues Under Section 3(5) of the Employee Retirement Income Security Act, 37545-37548 [2019-16072]

Agencies

• Employee Benefits Security Administration
• DEPARTMENT OF LABOR

[Federal Register Volume 84, Number 147 (Wednesday, July 31, 2019)]
[Proposed Rules]
[Pages 37545-37548]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-16072]



Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / 
Proposed Rules

[[Page 37545]]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Parts 2510

RIN 1210-AB92


``Open MEPs'' and Other Issues Under Section 3(5) of the Employee 
Retirement Income Security Act

AGENCY: Employee Benefits Security Administration, U.S. Department of 
Labor.

ACTION: Request for information.

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SUMMARY: This document is a request for information regarding the 
definition of ``employer'' in section 3(5) of the Employee Retirement 
Income Security Act of 1974, as amended (ERISA). The document mainly 
seeks comments on whether to amend our regulations to facilitate the 
sponsorship of ``open MEPs'' by persons acting indirectly in the 
interests of unrelated employers whose employees would receive benefits 
under such arrangements. The term ``open MEP'' in this document refers 
to a single defined contribution retirement plan that covers employees 
of multiple unrelated employers. The information received in response 
to the questions in this document may form the basis of future 
rulemaking under ERISA. This request for information was triggered in 
part by public comments received on a related rulemaking action under 
section 3(5) of ERISA, with respect to which a final rule is being 
published elsewhere in this issue of this Federal Register. This 
document also solicits information on other issues raised by these 
commenters, but which were considered beyond the scope of that final 
rule.

DATES: Comments should be submitted to the Department on or before 
October 29, 2019.

ADDRESSES: You may submit written comments, identified by 1210-AB92, to 
either of the following addresses:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Office of Regulations and Interpretations, Employee 
Benefits Security Administration, Room N-5655, U.S. Department of 
Labor, 200 Constitution Avenue NW, Washington, DC 20210, Attention: 
1210-AB92 ``Open MEPs'' and Other Issues Under Section 3(5) of ERISA.
    Instructions: All submissions received must include the agency name 
and Regulatory Identifier Number (RIN) for this rulemaking. Persons 
submitting comments electronically are encouraged not to submit paper 
copies. Comments will be available to the public, without charge, 
online at http://www.regulations.gov and http://www.dol.gov/agencies/ebsa, and at the Public Disclosure Room, Employee Benefits Security 
Administration, Suite N-1513, 200 Constitution Avenue NW, Washington, 
DC 20210.

    Warning: Do not include any personally identifiable or 
confidential business information that you do not want publicly 
disclosed. Comments are public records posted on the internet as 
received and can be retrieved by most internet search engines.


FOR FURTHER INFORMATION CONTACT: Colleen Brisport, Office of 
Regulations and Interpretations, Employee Benefits Security 
Administration, (202) 693-8500. This is not a toll-free number.

SUPPLEMENTARY INFORMATION: 

I. Background

A. In General

    The Department of Labor (Department) published a final rule (MEP 
Final Rule) in this issue that expands access to affordable quality 
retirement savings options by clarifying the circumstances under which 
an employer group or association or a professional employer 
organization (PEO) may sponsor a single workplace defined contribution 
retirement plan under title I of ERISA (as opposed to providing an 
arrangement that constitutes multiple retirement plans). The final 
regulation does this by clarifying that employer groups or associations 
and PEOs can, when satisfying certain criteria, constitute 
``employers'' within the meaning of section 3(5) of ERISA. As an 
``employer,'' the group or association, or PEO, can sponsor a single 
defined-contribution ``employee pension benefit plan'' within the 
meaning of section 3(2) of ERISA, for its members or client employers 
(such plans, whether characterized as ``Association Retirement Plans'' 
or not, are collectively referred to hereinafter as Multiple Employer 
Plans, ``MEPs,'' unless otherwise specified).
    The MEP Final Rule responds to Executive Order 13847, 
``Strengthening Retirement Security in America'' issued on August 31, 
2018 (Executive Order), which directed the Secretary of Labor to 
examine policies that would: (1) Clarify and expand the circumstances 
under which United States employers, especially small and mid-sized 
businesses, may sponsor or adopt a MEP as a workplace retirement option 
for their employees, subject to appropriate safeguards; and (2) 
increase retirement security for part-time workers, sole proprietors, 
working owners, and other entrepreneurial workers with non-traditional 
employer-employee relationships by expanding their access to workplace 
retirement plans, including MEPs.

B. The Statute

    ERISA applies not to every employee benefit plan, but, as relevant 
here, to an ``employee benefit plan'' sponsored by an ``employer.'' 
ERISA Sec.  4(a)(1); 29 U.S.C. 1003(a)(1).\1\ Section 3(5) of ERISA, in 
turn, defines the term ``employer.'' In relevant part it states that 
the term ``employer'' means ``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.'' 29 U.S.C. 1002(5).
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    \1\ ERISA also covers benefit plans established or maintained by 
employee organizations and such plans established or maintained by 
both employers and employee organizations.
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C. Bona Fide Groups or Associations of Employers

    Under the MEP Final Rule, a bona fide group or association of 
employers is considered an ``employer'' and may sponsor a MEP for its 
members if certain conditions are satisfied. Four of these criteria are 
that the group or association must have a formal organizational 
structure, be controlled by its employer members, have at least one 
substantial business purpose unrelated to offering and providing 
employee benefits to its members, and limit plan participation to 
employees and former employees of employer members. In addition, 
employer members must have a commonality of interest, each employer 
must directly act as an employer of at least one employee participating 
in the MEP, and the group or association must not be a financial 
services firm. The commonality criteria is satisfied if the employer 
members have common geography or industry--i.e., they are in the same 
trade, industry, line of business or profession; or each employer has a 
principal place of business in the same region that does not exceed the 
boundaries of a single State or metropolitan area (even if the 
metropolitan area includes more than one State).

D. Bona Fide Professional Employer Organizations

    Under the MEP Final Rule, a bona fide PEO is considered an 
``employer'' and may sponsor a MEP for its client employers if four 
conditions are

[[Page 37546]]

satisfied.\2\ The PEO must perform substantial employment functions on 
behalf of its client employers. The PEO must have substantial control 
over the functions of the MEP, as the plan sponsor, administrator, and 
a named fiduciary. The PEO must ensure that each client employer has at 
least one employee covered under the MEP. The PEO also must ensure that 
participation in the MEP is available only to employees and former 
employees.
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    \2\ A PEO generally refers to an organization that enters into 
an agreement with a client to perform some or all of the federal 
employment tax withholding, reporting, and payment functions related 
to workers performing services for the client. The provisions of a 
PEO arrangement typically state that the PEO assumes certain 
employment responsibilities that the client-employer would otherwise 
fulfill with respect to employees.
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E. Need for This Request for Information

    The MEP Final Rule was preceded by a notice of proposed rulemaking 
(Proposed Rule) on the same topic.\3\ The Proposed Rule solicited 
comments on, inter alia, so-called ``open MEPs'' or ``pooled employer 
plans,'' which generally are arrangements that cover employees of 
employers with no relationship other than their joint participation in 
the MEP. The Proposed Rule specifically requested comments on whether, 
and under what circumstances, these arrangements should and could be 
operated as ERISA-covered plans. The solicitation asked commenters who 
believe that these arrangements should be addressed by rulemaking to 
include a discussion of why such an arrangement should be treated as 
one employee benefit plan within the meaning of title I of ERISA rather 
than as a collection of separate employer plans being serviced by a 
commercial enterprise that provides retirement plan products and 
services. Such commenters also were encouraged to provide suggestions 
regarding the regulatory conditions that should apply to these 
particular arrangements.
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    \3\ 83 FR 53534 (October 23, 2018).
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    The Department received approximately sixty (60) comments in 
response to the Proposed Rule. More than half of the comments received 
addressed this issue, and the majority were supportive of the 
Department promulgating a rule that would facilitate these 
arrangements.\4\ Supporting commenters argued that open MEPs would best 
promote the objectives of Executive Order 13847 and that open MEPs are 
not precluded by ERISA. They argued that the text of ERISA demonstrates 
that open MEPs may be sponsored by ``any person acting . . . indirectly 
in the interest of an employer, in relation to an employee benefit 
plan.'' They asserted that the Proposed Rule contained an unnecessarily 
narrow interpretation of ``employer'' under section 3(5) of ERISA. They 
speculated that the narrow view in the Proposed Rule was likely 
influenced by the Department's experience with abusive Multiple 
Employer Welfare Arrangement (MEWA) schemes in the past, but they aver 
that defined contribution MEPs are structurally different arrangements 
with fundamentally different regulatory ecosystems than MEWAs.
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    \4\ Comments on the Proposed Rule are available here: https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AB88.
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    But even among the supporters of open MEPs, there were very 
different ideas on how the Proposed Rule might best be amended to 
facilitate open MEPs. Some commenters, for example, recommended 
eliminating some or all of the substantial business purpose, control, 
and commonality requirements from the Proposed Rule's bona fide group 
or association provisions, and the provision that prohibits financial 
services firms from being the group or association that establishes the 
MEP. Other commenters, however, recommended modifications to, and an 
expansion of, the Proposed Rule's bona fide PEO provisions. These 
commenters argued that the bona fide PEO framework, with appropriate 
modifications, could readily be expanded beyond the narrow scope of 
PEOs to include commercial enterprises more generally. To these 
commenters, a commercial entity's willingness to exert substantial 
control over the functions and activities of the MEP, as the plan 
sponsor, plan administrator, and as a named fiduciary provides a 
sufficient basis to conclude that such an entity is acting ``indirectly 
in the interest of an employer . . . in relation to an employee benefit 
plan'' for purposes of section 3(5) of ERISA, without regard to whether 
the entity is a PEO.
    Not all commenters, however, supported the idea of open MEPs. Some 
commenters supported the prohibition against commercial entities and 
financial services firms being able to sponsor MEPs as an ``employer'' 
under section 3(5) of ERISA. Among other things, these commenters 
raised issues regarding statutory authority and potential conflicts of 
interests among those businesses, entities, and other commercial 
ventures that most likely would be interested and willing to sponsor 
open MEPs. A few commenters viewed the topic of open MEPs as perhaps 
being better suited for legislation, given the wide range of issues 
presented under ERISA and the Internal Revenue Code (Code).
    After reviewing the comments, the Department is persuaded that open 
MEPs deserve further consideration. The Department does not believe 
that it has acquired a sufficient public record on, or a thorough 
understanding of, the complete range of issues presented by the topic. 
In light of this and the conflict in the comments about whether and how 
to permit open MEPs, as well as legislation pending in the 116th 
Congress, the Department has decided to stimulate further debate and to 
further develop the public record by soliciting comments on a broad 
range of issues relating to open MEPs, as set forth in Section II of 
this document.

F. Regulatory Authority

    The Department has broad authority to craft regulations under 
section 505 of ERISA. This section provides, in relevant part, that 
``the Secretary may prescribe such regulations as he finds necessary or 
appropriate to carry out the provisions of this subchapter.'' This 
authority extends to situations where, as here, the text of ERISA 
section 3(5) is ambiguous on its face.\5\
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    \5\ See 83 FR 28912, 14 (June 21, 2018); 83 FR 53534, 37 (Oct. 
23, 2018) (citing case law that observed the ambiguity).
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II. Request for Information

    This document contains a number of questions. Respondents need not 
answer every question, but should identify, by number, each question 
addressed. Interested persons also are encouraged to address any other 
matters they believe are germane to the general topic of the request 
for information.\6\
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    \6\ Comments will be shared with the Department of the Treasury.
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A. ``Open MEPs''

    1. Should the Department amend 29 CFR 2510.3-55 to expressly permit 
financial institutions or other persons to maintain a single defined 
contribution retirement plan on behalf of multiple unrelated employers 
(hereinafter ``open MEP'')? Many commenters on the Proposed Rule argued 
in support of open MEPs. Do you agree with the commenters? If the 
answer is yes or no, why?
    2. What type of person or persons should be recognized as capable 
of being an ``employer'' under the ``indirectly in the interest'' 
clause in section 3(5) of ERISA for purposes of establishing and 
maintaining an open MEP? For example, many commenters suggested that 
banks, insurance companies, broker-dealers, and other

[[Page 37547]]

similar financial services firms (including pension recordkeepers and 
third-party administrators) (hereinafter ``Commercial Entities'') 
should be recognized for this purpose. Are these commenters correct, 
and why? What, if any, are appropriate limitations on the types of 
Commercial Entities that should be recognized as employers?
    3. If a Commercial Entity could sponsor an open MEP, what conflicts 
of interest, if any, would the Commercial Entity, affiliates, and 
related parties likely have with respect to the plan and its 
participants? To what extent could a Commercial Entity that sponsors 
the open MEP affect its own compensation or the compensation of 
affiliates or related parties through its actions as a sponsor, 
fiduciary, or service provider to the plan? What categories of fees and 
compensation, direct or indirect, would Commercial Entities, 
affiliates, and related parties likely receive as a result of 
sponsoring the MEP, rendering services to the MEP, or offering 
investments (including proprietary products) to the MEP? How could 
these or other such conflicts of interest be appropriately mitigated? 
How effective would the suggested conflict-mitigation approaches likely 
be in safeguarding MEPs from conduct that favors the interests of the 
Commercial Entity, affiliates, or related parties at the plan's 
expense? Would prohibited transaction exemptions be necessary to avoid 
violations of Section 406 of ERISA and imposition of excise taxes under 
Section 4975(c) of the Internal Revenue Code? Are different mitigating 
provisions appropriate for different Commercial Entities, and why or 
why not?
    4. The current regulation contains provisions that limit the 
breadth of ERISA section 3(5)'s ``indirectly in the interest'' clause 
as applied to the two types of multiple employer plans covered by that 
regulation. For instance, in the case of a bona fide group or 
association, the regulation contains the commonality and control 
requirements. As another example, in the case of a bona fide PEO, the 
regulation contains the substantial employment functions and control 
requirements. Are limiting principles or conditions needed in the case 
of open MEPs? Please explain why or why not. If such principles or 
conditions are necessary or helpful, please provide examples of 
principles or conditions that would be appropriate limitations along 
with reasons for such limitations.
    5. Commenters offered two distinctly different approaches on how 
the current regulation could be reformulated to facilitate open MEPs. 
For example, some commenters recommended amending the bona fide group 
or association provisions by deleting the commonality and control 
requirements, and the prohibition on Commercial Entities. Other 
commenters, by contrast, recommended modifying the bona fide PEO 
provisions to cover Commercial Entities, but with additional or 
different criteria to reflect the differences between PEOs and these 
other entities. What are the benefits and drawbacks of each of these 
approaches, and are there other approaches or alternatives the 
Department should consider?
    6. If the Department took either approach described in the prior 
question, what would the impact be on MEPs offered by existing groups 
or associations of employers or by existing PEOs? Is there a risk that 
open MEPs, under either approach, would undermine or destabilize these 
existing arrangements? For example, would nationwide open MEPs 
undermine or destabilize geography-based MEPs sponsored by groups or 
associations? If so, what steps could the Department take to mitigate 
such impacts? For instance, commenters on the Proposed Rule suggested 
that bona fide group or association MEPs should be permitted to cover 
regions larger than the boundaries of a single State or metropolitan 
area that includes more than one State. Are these commenters correct? 
Why or why not?
    7. Some commenters raised concerns about the potential cost and 
complexity arising from the application of the various qualification 
requirements under section 401(a) of the Code (e.g., nondiscrimination, 
exclusive benefit, minimum participation, minimum coverage, and top-
heavy requirements) to the potentially large numbers of employers that 
theoretically could participate in a nationwide open MEP. These 
commenters are concerned that the cost and complexity of these 
requirements in this context may offset some of the savings otherwise 
associated with establishing and maintaining an open MEP. Are these 
commenters correct? If so, do the potential costs and complexities 
outweigh the benefits of offering open MEPs?
    8. Would a regulation facilitating the adoption and marketing of 
open MEPs by Commercial Entities have an impact on the implementation, 
administration, or enforcement of any State or federal laws, apart from 
ERISA and the Internal Revenue Code, particularly including securities, 
insurance, and banking laws? Are there any specific issues relating to 
such other laws, which the Department should consider in connection 
with any rulemaking effort?

B. Corporate MEPs

    The Proposed Rule solicited comments on whether the MEP Final Rule 
should address the status of so-called ``corporate MEPs,'' a term not 
defined in ERISA. For that purpose, the Proposed Rule considered 
``corporate MEPs'' to be defined contribution plans that cover 
employees of employers related by some level of common ownership, but 
that are not in the same controlled group or affiliated service group 
within the meaning of section 414(b), (c), or (m) of the Code.
    In response, one commenter provided an example of what it described 
as a common fact pattern that should be addressed by rulemaking or 
other guidance. The example involves two companies, A and B, in 
different industries and different parts of the country, where, as a 
result of an acquisition, A now owns 60% of B but the remaining 40% of 
B is owned by unrelated parties. If A and B jointly maintain a 
retirement plan for the benefit of their employees, it does not appear 
that A and B would meet the commonality of interest conditions to 
qualify as a MEP and, consequently, this ``corporate MEP'' would not be 
a single plan under the Proposed Rule, but instead would be two plans 
for purposes of ERISA.
    The Department recognizes that meaningful levels of common 
ownership may serve as an indicator that the members of the ownership 
group have among themselves a sufficient relationship, unrelated to the 
provision of benefits. This relationship may be enough such that one or 
more of these members can be said to be acting ``indirectly in the 
interest of'' the others within the meaning of ERISA section 3(5) to 
sponsor a MEP for the group's participation. In DOL Advisory Opinion 
89-06A, for example, the Department opined that a member of a 
controlled group of corporations that establishes a benefit plan for 
its employees and the employees of other members of the controlled 
group is considered to be an employer within the meaning of ERISA 
section 3(5), such that only one plan exists for all members of the 
group.\7\
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    \7\ With respect to a plan maintained by one or more members of 
a controlled group of corporations (within the meaning of section 
1563(a) of the Code, determined without regard to sections 
1563(a)(4) and (e)(3)(C)), all employees of such corporations shall 
be treated as employed by a single employer. 29 USC 1060(c).
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    On the existing public record, however, the Department lacks a 
meaningful basis on which to determine the precise level of ownership, 
below the controlled group of corporations

[[Page 37548]]

threshold established in section 414(b) of the Code (or the 
corresponding threshold for a controlling interest in a trade or 
business in section 414(c) of the Code), that conclusively 
distinguishes bona fide ownership groups from commercial enterprises in 
which members have nominal ownership levels and which exist primarily 
or solely to market, distribute, underwrite or otherwise provide 
employee benefits to the nominal owners.
    9. Should the Department amend 29 CFR 2510.3-55 to address 
``corporate MEPs,'' and if so, why and how? Apart from the definition 
of a controlled group of corporations within the meaning of section 
414(b) of the Code, (or a group of trades or businesses under common 
control within the meaning of section 414(c) of the Code), is there a 
precise level of common ownership that could and should be used to deem 
two or more corporations, trades, or businesses to have sufficient 
ownership ties such that any one of these corporations, trades, or 
businesses can be said to be able to act ``indirectly in the interest 
of'' the others within the meaning of ERISA section 3(5) to sponsor a 
MEP for the group's participation? Are there aspects of control or 
commonality that the Department should consider in addition to the 
precise level of common ownership? Put another way, if the Department 
were to consider facts and circumstances, either in addition to, or in 
lieu of, level of common ownership, what facts and circumstances would 
be appropriate to consider? Also, what sufficient ties are needed for 
two or more tax-exempt organizations or a tax-exempt organization and 
another organization to be treated as an employer within the meaning of 
section 3(5) of ERISA?
    10. Should members of an ``affiliated service group'' within the 
meaning of section 414(m) of the Code be treated as an employer within 
the meaning of section 3(5) of ERISA? If so, why?

C. Economic Analysis, Paperwork Reduction Act, and Regulatory 
Flexibility Act Questions

    Executive Order 12866 (E.O. 12866) requires an assessment of the 
anticipated costs and benefits to the government and the public of a 
significant rulemaking action, and of the alternatives considered, 
using the guidance provided by the Office of Management and Budget. 
Under E.O. 12866, a determination must be made whether implementation 
of this rule will be economically significant. A rule that has an 
annual effect on the economy of $100 million or more is considered 
economically significant.
    In addition, the Regulatory Flexibility Act may require the 
preparation of an analysis of the impact on small entities of proposed 
rules and regulatory alternatives. A regulatory flexibility analysis 
must generally include, among other things, an estimate of the number 
of small entities subject to the regulations (for this purpose, plans, 
employers, and issuers and, in some contexts small governmental 
entities), the expense of the reporting, recordkeeping, and other 
compliance requirements (including the expense of using professional 
expertise), and a description of any significant regulatory 
alternatives considered that would accomplish the stated objectives of 
the statute and minimize the impact on small entities. For this 
purpose, the Agency considers a small entity to be an employee benefit 
plan with fewer than 100 participants.
    The Paperwork Reduction Act requires an estimate of how many 
``respondents'' will be required to comply with any ``collection of 
information'' requirements contained in regulations and how much time 
and cost will be incurred by the respondents as a result. A collection 
of information includes recordkeeping, reporting to governmental 
agencies, and third-party disclosures.
    The Department is requesting comments that may contribute to the 
analyses that will be performed under these requirements, both 
generally and with respect to the following specific areas:
    11. What costs and benefits would be associated with allowing an 
open MEP consisting of employers with no relationship other than their 
joint participation in the MEP to be operated as a single ERISA-covered 
plan? How would the costs and benefits of open MEPs compare to those 
associated with MEPs sponsored by bona fide groups and associations and 
(PEOs)? Please explain.
    12. What types of entities would have business motives to sponsor 
open MEPs? For each type, how prevalent would their sponsorship likely 
be? What would be the economic advantages and disadvantages of each 
type of entity for employers and participants and beneficiaries? Please 
explain.
    13. What types of employers would join open MEPs? What size would 
they be (i.e., would large employers, mid-size employers, or small 
employers be particularly interested in joining an open MEP)? How many 
would join open MEPs to begin offering retirement benefits to workers 
who previously did not have access to them? How many employers would be 
switching away from another type of retirement savings vehicle or plan? 
What type? Please explain.
    14. Please describe how prevalent automatic enrollment would likely 
be among employers that join open MEPs.
    15. Please describe how common it will likely be for employers 
participating in open MEPs to accept rollovers from other qualified 
plans.
    16. Please indicate how many self-employed people are likely to 
join open MEPs.
    17. Please compare the overall cost of providing defined 
contribution retirement benefits among the following types of 
retirement plans:
    a. Open MEPs.
    b. MEPs sponsored by bona fide groups and associations.
    c. MEPs sponsored by PEOs.
    d. Single-employer plans sponsored by small businesses.
    Additionally, please compare what the likely total plan fees will 
be for a.-d. Please compare the likely costs and fees for various 
component services, such as asset management, recordkeeping, and 
marketing and distribution, across a-d.
    18. What costs and benefits would be associated with allowing 
corporate MEPs described in Section B., above, to operate as single 
ERISA-covered defined contribution plans?

    Signed at Washington, DC, on July 22, 2019.
Preston Rutledge,
Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.
[FR Doc. 2019-16072 Filed 7-29-19; 8:45 am]
 BILLING CODE 4510-29-P