Definition of “Employer” Under Section 3(5) of ERISA-Association Retirement Plans and Other Multiple-Employer Plans, 37508-37544 [2019-16074]

Download as PDF 37508 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations Office of Regulations and Interpretations, Employee Benefits Security Administration, (202) 693– 8500. This is not a toll-free number. SUPPLEMENTARY INFORMATION: DEPARTMENT OF LABOR Employee Benefits Security Administration 29 CFR Part 2510 A. Background RIN 1210–AB88 Definition of ‘‘Employer’’ Under Section 3(5) of ERISA—Association Retirement Plans and Other Multiple-Employer Plans Employee Benefits Security Administration, Department of Labor. ACTION: Final rule. AGENCY: This document contains a final regulation under title I of the Employee Retirement Income Security Act (ERISA) that expands access to affordable quality retirement saving options by clarifying the circumstances under which an employer group or association or a professional employer organization (PEO) may sponsor a multiple employer workplace retirement plan under title I of ERISA (as opposed to providing an arrangement that constitutes multiple separate 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 ERISA for purposes of establishing or maintaining an individual account ‘‘employee pension benefit plan’’ within the meaning of ERISA. As an ‘‘employer,’’ a group or association, as well as a PEO, can sponsor a defined contribution retirement plan for its members (collectively referred to as ‘‘multiple employer plans’’ or ‘‘MEPs’’ unless otherwise specified). Thus, different businesses may join a MEP, either through a group or association or through a PEO. The final regulation also permits certain working owners without employees to participate in a MEP sponsored by an employer group or association. The final rule primarily affects groups or associations of employers, PEOs, plan participants, and plan beneficiaries. It does not affect whether groups, associations, or PEOs assume joint-employment relationships with member-employers or client employers. But it may affect banks, insurance companies, securities brokerdealers, record keepers, and other commercial enterprises that provide retirement-plan products and services to ERISA plans and plan sponsors. DATES: This final regulation is effective on September 30, 2019. FOR FURTHER INFORMATION CONTACT: Mara S. Blumenthal or Frances P. Steen, jbell on DSK3GLQ082PROD with RULES3 SUMMARY: VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 1. Need To Expand Access to Workplace Retirement Plans Expanding access to workplace retirement plans is critical to helping more American workers financially prepare to retire. Approximately 38 million private-sector employees in the United States do not have access to a retirement plan through their employers.1 According to the U.S. Bureau of Labor Statistics, 23 percent of all private-sector, full-time workers have no access to a workplace retirement plan.2 The percentage of private-sector workers without access to a workplace retirement plan increases to 32 percent when part-time workers are included.3 Small businesses are less likely to offer retirement benefits. In 2018, approximately 85 percent of workers at private-sector establishments with 100 or more workers were offered a retirement plan. In contrast, only 53 percent of workers at private-sector establishments with fewer than 100 workers had access to such plans.4 Contingent or temporary workers are less likely to have access to a workplace retirement plan than those who are traditionally employed.5 Access to an 1 This number was estimated by the U.S. Department of Labor’s Employee Benefits Security Administration using statistics from the U.S. Bureau of Labor Statistics, National Compensation Survey: Employee Benefits in the United States, March 2018 (https://www.bls.gov/ncs/ebs/benefits/ 2018/employee-benefits-in-the-united-states-march2018.pdf). According to Table 2 (entitled Retirement Benefits: Access, Participation and Take-up rates, Private Industry Workers) of this survey, approximately 68% of private-sector industry workers have access to retirement benefits through their employers in 2018. According to Appendix Table 2, the survey represents approximately 118.1 million workers in 2018. Thus, the number of private industry workers without access to retirement plans through their employers is estimated to be approximately 38 million ((100%¥68%) × 118.1 million). 2 U.S. Bureau of Labor Statistics, National Compensation Survey: Employee Benefits in the United States, March 2018 at Table 2 (entitled Retirement Benefits: Access, Participation and Take-up rates, Private Industry Workers). The survey is available at (www.bls.gov/ncs/ebs/ benefits/2018/employee-benefits-in-theunitedstates-march-2018.pdf). 3 Id. 4 Id. 5 See U.S. Bureau of Labor Statistics, Contingent and Alternative Employment Arrangements—May 2017. See also Copeland, Employee Benefit Research Institute, Employment-Based Retirement Plan Participation: Geographic Differences and Trends, 2013, (October 2014); U.S. Government Accountability Office, Contingent Workforce: Size, Characteristics, Earnings, and Benefits, April 20, PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 employment-based retirement plan is critical to the financial security of aging workers. Among workers who do not have access to a workplace retirement plan, only about 13 percent regularly contribute to individual retirement accounts, commonly called IRAs.6 Cost and regulatory complexity discourage employers—especially small businesses—from offering workplace retirement plans for their employees. Establishing and maintaining a plan can be expensive for small businesses. A survey by the Pew Charitable Trusts found that only 53 percent of small-to mid-sized businesses offer a retirement plan; 37 percent of those not offering a plan cited cost as a reason.7 Employers often cite annual reporting costs and exposure to potential fiduciary liability as major impediments to plan sponsorship. 8 Although there are ways to save for retirement outside of the workplace, none are as advantageous to workers as employment-based plans. IRAs, for example, are not comparable to workplace retirement savings options. As compared to IRAs, ERISA-covered retirement plans offer private sector workers: (1) Higher contribution limits; (2) generally lower investment 2015; U.S. Gov’t Accountability Office, GAO–15– 566, RETIREMENT SECURITY—Federal Action Could Help State Efforts to Expand Private Sector Coverage (Sept. 2015) (www.gao.gov/assets/680/ 672419.pdf) 6 The Department calculated this using Survey of Income and Program Participation 2008 Panel Data Waves 10 and 11. 7 The Pew Charitable Trusts, Employer Barriers to and Motivations for Offering Retirement Benefits, (June 2017) (http://www.pewtrusts.org/-/media/ assets/2017/09/ employerbarrierstoandmotivations.pdf) (‘‘Most commonly, employers without plans said that starting a retirement plan is too expensive to set up (37 percent). Another 22 percent cited a lack of administrative resources. In focus groups, some business representatives said their mix of workers— especially if they included low-wage or short-term employees—translated into limited employee interest in or demand for retirement benefits. But in the survey, only 17 percent cited lack of employee interest as the main reason they did not offer a plan.’’). 8 Two other types of pension arrangements share features of MEPs, but are not the focus of this rule. First, a ‘‘multiemployer plan’’ as defined in ERISA section 3(37) is a plan to which more than one employer is required to contribute and which is maintained pursuant to one or more collective bargaining agreements between one or more employee organizations and more than one employer. Second, Pre-Approved Retirement Plans, are plans that providers, such as financial institutions, make available for adoption by employers and that have been pre-approved by the IRS. See Rev. Proc. 2017–41, 2017–29 IRB 92. A plan that uses a Pre-Approved Plan document may either be a single-employer plan or a MEP. With respect to single-employer Pre-Approved Plans, providers often offer centralized administration services and pool the assets of different plans into a central investment fund, such as an IRS Rev. Rul. 81–100 group trust. E:\FR\FM\31JYR3.SGM 31JYR3 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations management fees as the size of plan assets increases; (3) a well-established uniform regulatory structure with important consumer protections, including fiduciary obligations, recordkeeping and disclosure requirements, legal accountability provisions, and spousal protections; (4) automatic enrollment; and (5) stronger protections from creditors. At the same time, workplace retirement plans enhance employers’ ability to choose among a wide variety of plan features and the flexibility to tailor retirement plans to meet their business and employment needs. Although many MEPs already exist, past sub-regulatory guidance issued by the Department and uncertainty about the ability of PEOs and associations to sponsor MEPs as ‘‘employers’’ may have hindered the creation of MEPs. As the Department also learned through its ‘‘association health plan’’ rulemaking process (AHP Rule), described in section 3 of this preamble, many employer groups and associations are interested in offering employee benefits to their members, but view the Department’s prior interpretive guidance as too restrictive, creating an undue impediment to greater sponsorship of retirement plans. Likewise, we understand that an active PEO industry already exists 9 and that its members, much like employer groups and associations, offer or would like to offer MEPs to their clients. At least some PEOs may be discouraged from doing so by a lack of clear standards, to the detriment of employers, especially small employers. jbell on DSK3GLQ082PROD with RULES3 2. Legislative Activity In recent years, members of Congress have also sought to promote MEPs through legislation, including recent legislative proposals that address socalled ‘‘open MEPs,’’ which are plans that cover employees of employers with no relationship other than their joint participation in the MEP. Since the publication of the proposal and the beginning of the 116th Congress, seven bills dealing with this topic have been introduced, including H.R. 1994, the ‘‘Setting Every Community Up for Retirement and Enhancement Act of 2019,’’ commonly known as the ‘‘SECURE Act,’’ which was passed overwhelmingly by the House of Representatives on May 23, 2019 by a 9 The IRS has already recognized that a PEO may offer a MEP for its clients under the Code. See IRS Rev. Proc. 2002–21 (describing steps that may be taken to ensure the qualified status of defined contribution multiple employer plans maintained by PEOs). VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 vote of 417–3.10 The SECURE Act, in relevant part, makes comprehensive changes to ERISA and the Code to facilitate open MEPs. The final rule differs in significant ways from the legislative proposals introduced in Congress. In particular, this rule is significantly more limited in scope because it relies solely on the Department’s authority to promulgate regulations administering title I of ERISA. Unlike the Department, Congress has authority to make statutory changes to ERISA and other areas of law that govern retirement savings, such as the Code. 3. Association Health Plan Rule As mentioned above, the Department recently promulgated a similar rule to expand access to more affordable, quality healthcare by enhancing the ability of employers to band together to provide health benefits through a single ERISA-covered plan, called an ‘‘association health plan.’’ That regulation, the AHP Rule, issued on June 21, 2018, explains how employers acting together to provide such health benefits may meet the definition of the term ‘‘employer’’ in ERISA section 3(5).11 The AHP Rule sets forth several criteria under which groups or associations of employers may establish an ERISA-covered multiple employer group health plan. Several commenters on the AHP proposed rule encouraged the Department to bring MEPs within the scope of that rule or a new rule. In the AHP Rule, the Department said it 10 The SECURE Act had originally been introduced on March 22, 2019 on a bipartisan basis by House Ways and Means Chairman Richard Neal (D–MA), Ranking Member Kevin Brady (R–TX), Rep. Mike Kelly (R–PA) and Rep. Ron Kind (D–WI). The SECURE Act contains the MEP provisions found in S. 972/H.R. 1007, the ‘‘Retirement and Enhancement Savings Act of 2019’’ or ‘‘RESA,’’ introduced by Senate Finance Committee Chair Charles Grassley (R–IA) and Ranking Member Sen. Ron Wyden (D–OR) on April 1, 2019 and Rep. Ron Kind (D–WI) and 38 cosponsors on February 6, 2019, respectively, and H.R. 1084, the ‘‘Family Savings Act,’’ introduced in February 7, 2019 by Rep. Mike Kelly (R–PA) and 9 cosponsors. The other three MEP bills introduced in the 116th Congress are H.R. 198, the ‘‘Retirement Security for American Workers Act,’’ introduced by Reps. Vern Buchanan (R–FL) and Ron Kind (D–WI) on March 27, 2019; S. 1101, the ‘‘Small Business Employees Retirement Enhancement Act, introduced by Sens. Tom Cotton (R–AR), Todd Young (R–IN), and Doug Jones (D–AL) on April 3, 2019; and S. 321, the ‘‘Retirement Security Act of 2019, introduced by Sens. Susan Collins (R–ME) and Maggie Hassan (D– NH) on February 4, 2019. In the 115th Congress, there were eight bills introduced containing MEP provisions. 11 83 FR 28912 (June 21, 2018). In State of New York v. United States Department of Labor, 363 F. Supp. 3d 109 (D.D.C. March 28, 2019), the District Court vacated portions of the Department’s final rule on AHPs. The Department disagrees with the District Court’s ruling and an appeal has been filed. PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 37509 would consider those comments in the retirement plan context.12 4. Executive Order 13847 On August 31, 2018, President Trump issued Executive Order 13847, ‘‘Strengthening Retirement Security in America,’’ (Executive Order), which states that ‘‘[i]t shall be the policy of the Federal Government to expand access to workplace retirement plans for American workers.’’ The Executive Order directed the Secretary of Labor to examine policies that would: (1) Clarify and expand the circumstances under which U.S. employers, especially small and mid-sized businesses, may sponsor or adopt a MEP as a workplace retirement savings 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 nontraditional employer-employee relationships by expanding their access to workplace retirement savings plans, including MEPs. The Executive Order further directed, to the extent consistent with applicable law and the policy of the Executive Order, that the Department consider within 180 days of the date of the Executive Order whether to issue a notice of proposed rulemaking, other guidance, or both, that would clarify when a group or association of employers or other appropriate business or organization could be an ‘‘employer’’ within the meaning of ERISA section 3(5). The Department has authority to interpret the statutes it administers, and it believes that it is appropriate to clarify how the statutory definition of ‘‘employer,’’ 29 U.S.C. 1002(5), should apply to certain MEPs under title I of ERISA. For several reasons, the Department has chosen to retain nearly the same criteria for these MEPs that it proposed. The Department is not opining, however, on whether other types of MEPs with different or lessstringent criteria, or different ‘‘employers,’’ may also qualify under title I. The Department had previously issued subregulatory guidance interpreting this section 3(5) of ERISA that took a narrow view of the circumstances under which a group or association of employers could band together to act ‘‘in the interest of’’ employer members in relation to the offering of retirement savings plans. By clarifying its interpretation of the statutory language, the Department expects to improve access to employer12 Id. E:\FR\FM\31JYR3.SGM at 28964, n.10. 31JYR3 37510 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES3 sponsored retirement savings plans in America. The Department, therefore, is publishing this final rule interpreting the term ‘‘employer’’ for purposes of ERISA section 3(5). This rule facilitates the adoption and administration of MEPs and thereby expands access to workplace retirement plans, especially for employees of small and mid-size employers and for certain self-employed individuals. This final rule supersedes any preexisting subregulatory interpretive rulings under ERISA section 3(5) pertaining to bona fide groups or associations of employers and, at the same time, establishes more flexible standards and criteria for sponsorship of MEPs than currently articulated in that prior guidance. The final rule does not affect existing autoenrollment options and other features that make defined contribution plans attractive for employers. The final rule also has no superseding effect on Interpretive Bulletin 2015–02, as further explained below in the ‘‘Miscellaneous’’ section of this preamble. 5. Notice of Proposed Rulemaking On October 23, 2018, the Department published a proposed regulation (‘‘Proposed Rule’’) to clarify certain circumstances under which an employer group or association or a PEO may sponsor a MEP. More specifically, the Proposed Rule clarified that employer groups or associations and PEOs can, when satisfying certain criteria, constitute ‘‘employers’’ within the meaning of section 3(5) of ERISA for purposes of establishing or maintaining an ‘‘employee pension benefit plan’’ within the meaning of ERISA section 3(2). Under the terms of the Proposed Rule, a group or association, as well as a PEO, could sponsor a MEP as an ‘‘employer.’’ The Proposed Rule permitted different businesses to join a MEP, either through a group or association or through a PEO. The Proposed Rule also permitted certain working owners without employees to participate in a MEP sponsored by a group or association. The Proposed Rule identified the potential advantages of scale offered by MEPs. MEPs have the potential to broaden the availability of workplace retirement plans, especially among small employers, because they enable different businesses to band together and adopt a single retirement plan. Pooling resources in this way can reduce costs and encourage plan formation. For example, investment companies often charge lower fund fees for plans with greater asset accumulations. And because MEPs VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 facilitate the pooling of plan participants and assets in one large plan, rather than many small plans, they enable small businesses to give their employees access to the same low-cost funds as large employers offer. The Proposed Rule also identified other potential advantages of MEPs. For a small business, in particular, a MEP may present an attractive alternative to taking on the responsibilities of sponsoring or administering its own plan. The MEP structure can reduce the employer’s cost of sponsoring a benefit plan and effectively transfer substantial legal risk to professional fiduciaries responsible for the management of the plan. Although employers retain fiduciary responsibility for choosing and monitoring the arrangement and forwarding required contributions to the MEP, the employer can keep more of its day-to-day focus on managing its business, rather than the MEP. Under the Proposed Rule, participating employers were generally required to execute a participation agreement or similar instrument that lays out the rights and obligations of the MEP sponsor and the participating employer before participating. But these participating employers were not viewed as sponsoring their own separate, individual plans under ERISA. Rather, the MEP, if it met the conditions of the Proposed Rule, constituted a single employee benefit plan for purposes of title I of ERISA. Consequently, the MEP sponsor—and not the individual participating employers—generally was responsible, as plan administrator, for compliance with the requirements of title I of ERISA, including reporting, disclosure, and fiduciary obligations. This is so because the individual employers would not each have had to act as plan administrators under ERISA section 3(16) or as named fiduciaries under section 402 of ERISA. The Proposed Rule provided that an employer group or association or PEO could act as the ‘‘employer’’ sponsoring the plan within the meaning of section 3(5) of ERISA. This means that, typically, the employer group or association or PEO would act as a plan administrator and named fiduciary and, thus, would assume most fiduciary responsibilities. A MEP under the Proposed Rule is subject to all of the ERISA provisions applicable to defined contribution retirement plans, including the fiduciary responsibility and prohibited transaction provisions in title I of ERISA. As a plan that is maintained by more than one employer, a MEP also has to satisfy the requirements of section 210(a) of ERISA. PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 6. Legal Background a. Statutory Definitions ERISA section 4 governs the reach of ERISA and, accordingly, of the Department’s authority over benefit plans. ERISA applies not to every benefit plan but, as relevant here, to an ‘‘employee benefit plan’’ sponsored ‘‘by any employer.’’ ERISA section 4(a)(1); 29 U.S.C. 1003(a)(1).13 The provision reads in relevant part: ERISA ‘‘shall apply to any employee benefit plan if it is established or maintained by any employer engaged in commerce or in any industry or activity affecting commerce . . . .’’ ERISA defines ‘‘employee pension benefit plan’’ to include ‘‘any plan, fund, or program . . . established or maintained by an employer . . . to the extent that by its express terms or as a result of surrounding circumstances’’ it provides retirement income to employees or the deferral of income to the termination of employment or beyond. Thus, the term ‘‘employer’’ is essential to a benefit arrangement’s status as an ‘‘employee pension benefit plan’’ within the meaning of ERISA. A prerequisite for ERISA coverage is that the retirement plan must be established or maintained by an ‘‘employer.’’ ERISA section 3(5) defines the term ‘‘employer.’’ ERISA section 3(5); 29 U.S.C. 1002(5). ERISA’s definitional provision, in relevant part, 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.’’ When Congress enacted ERISA in 1974, it carried forward this important definition from the 1958 Welfare and Pension Plans Disclosure Act. Public Law 85–836, section 3(a)(4), 72 Stat. 997, 998 (1958). But ERISA does not explain what it means for an entity to act ‘‘directly as an employer’’ or ‘‘indirectly in the interest of an employer, in relation to an employee benefit plan.’’ Nor does the statute explain what is meant by a ‘‘group or association of employers.’’ In short, these ambiguous statutory terms are not themselves defined. As one court has recognized, the ‘‘problem lies, obviously enough, in determining what is meant by these oblique definitions of employer.’’ Meredith v. Time Ins. Co., 980 F.2d 352, 356 (5th Cir. 1993). The statutory lacunae have proven 13 ERISA also covers benefit plans established or maintained by employee organizations and such plans established or maintained by both employers and employee organizations. E:\FR\FM\31JYR3.SGM 31JYR3 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations problematic for some courts. They ‘‘have found the phrase ‘act . . . indirectly in the interest of an employer’ difficult to interpret.’’ See Mass. Laborers’ Health & Welfare Fund v. Starrett Paving Corp., 845 F.2d 23, 24 (1st Cir. 1988); accord Greenblatt v. Delta Plumbing & Heating Corp., 68 F.3d 561, 575 (2d Cir. 1995) (collecting cases). Also ambiguous is the statutory term ‘‘group or association of employers.’’ Because ERISA ‘‘does not define th[at] term,’’ this ‘‘void injects ambiguity into the statute.’’ MD Physicians & Assocs. v. State Bd. of Ind., 957 F.2d 178, 184 (5th Cir. 1992). Although ERISA contains a definition of ‘‘employer,’’ the important terms used within that definition are unexplained. In light of all this, and consistent with longstanding principles of administrative law, the Department is well-positioned to address this statutory ambiguity by exercising its rulemaking authority, see 29 U.S.C. 1135, to explicate some of the terms used in section 3(5). In doing so, the Department is aided both by the common understanding of the broad terms used in ERISA section 3(5) and by the statutory context. jbell on DSK3GLQ082PROD with RULES3 b. Bona Fide Groups or Associations The Department has long taken the position in subregulatory guidance that, even in the absence of the involvement of an employee organization, a single ‘‘multiple employer plan’’ under ERISA may exist where a cognizable group or association of employers, acting in the interest of its employer members, establishes a benefit program for the employees of member employers. To satisfy these criteria, the group or association must exercise control over the amendment process, plan termination, and other similar functions of the plan on behalf of the participating-employer members with respect to the plan and any trust established under the program.14 DOL guidance generally refers to these entities—i.e., entities that qualify as groups or associations, within the meaning of section 3(5)—as ‘‘bona fide’’ employer groups or associations.15 For each employer that adopts for its employees a program of pension or welfare benefits sponsored by an employer group or association that is not ‘‘bona fide,’’ such employer establishes its own separate employee benefit plan covered by ERISA.16 83 FR at 28912, 28920. e.g., Advisory Opinions 2008–07A, 2003– 17A, and 2001–04A. 16 See 83 FR 28912, 13 (citing Advisory Opinion 96–25A). Largely, but not exclusively, in the context of welfare-benefit plans, the Department has previously distinguished employer groups or associations that can act as ERISA section 3(5) employers in sponsoring multiple employer plans from those that cannot. To do so, the Department has asked whether the group or association has a sufficiently close economic or representational nexus to the employers and employees that participate in the plan that is unrelated to the provision of benefits.17 DOL advisory opinions and court decisions have long applied a facts-andcircumstances approach to determine whether there is a sufficient common economic or representational interest or genuine organizational relationship for there to be a bona fide employer group or association capable of sponsoring an ERISA plan on behalf of its employer members. This analysis has focused on three broad sets of issues, in particular: (1) Whether the group or association is a bona fide organization with business/ organizational purposes and functions unrelated to the provision of benefits; (2) whether the employers share some commonality and genuine organizational relationship unrelated to the provision of benefits; and (3) whether the employers that participate in a plan, either directly or indirectly, exercise control over the plan, both in form and substance. This approach has ensured that the Department’s regulation of employee benefit plans is focused on employment-based arrangements, as contemplated by ERISA’s text. c. Professional Employer Organizations According to the IRS, the term ‘‘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.’’ 18 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. Under the terms of a typical PEO client contract, the PEO assumes responsibility for paying the employees and for related employment tax compliance, and has attendant contractual responsibilities and obligations, without regard to payment from the client employer to the PEO. A 14 See 15 See, VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 17 See 83 FR 28912; see also Advisory Opinions 2012–04A, 1983–21A, 1983–15A, and 1981–44A. 18 Certified Professional Employer Organizations, 81 FR 27315 (May 6, 2016). PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 37511 PEO also may manage human resources, employee benefits, workerscompensation claims, and unemployment-insurance claims for the client employer. The client employer typically pays the PEO a fee based on payroll costs plus an additional amount.19 According to a representative of the PEO industry, the PEO assumes specific employer rights, responsibilities, and risks through the establishment and maintenance of a relationship with the workers of the client, including in some cases to reserve a right of direction and control of the employees with respect to particular matters. (i) Current Primary Legal Authority Although many PEOs administer plans for their client employers today, there is little direct authority on precisely what it means for a PEO or other entity to act ‘‘indirectly in the interest’’ of its client employers in relation to an employee benefit plan for purposes of ERISA section 3(5). Whether a PEO is an ‘‘employer’’ under section 3(5) depends on the ‘‘indirectly in the interest of an employer’’ provision, not the ‘‘employer group or association’’ provision. And neither existing subregulatory guidance nor judicial authority has articulated a specific test to determine when a PEO is sufficiently tied to its client-employer to be said to be acting ‘‘indirectly in the interest of an employer, in relation to an employee benefit plan,’’ within the meaning of section 3(5).20 The different statutory text and the differences in the nature of the employer relationships merit a different regulatory approach to PEOs than to employer groups or associations. (ii) Current Secondary Legal Authority Some federal statutes treat a PEO as an ‘‘employer’’ for certain limited purposes in other circumstances. For instance, regulations issued pursuant to the Family and Medical Leave Act of 1993 (FMLA) specifically recognize that a PEO may, under certain circumstances, enter into a relationship 19 Foster, Michael D., Certified Professional Employer Organizations (July 7, 2016) https:// www.jacksonkelly.com/tax-monitor-blog/certifiedprofessional-employer-organizations. 20 The lack of a specific and clear test leads to different outcomes. Compare Yearous v. Pacificare of California, 554 F. Supp. 2d 1132 (S.D. Cal. 2007) (applying factors in Nationwide Mut. Ins. Co. v Darden, 503 U.S. 318 (1992), court concluded that PEO is direct employer of owner of company for purposes of sponsoring an ERISA covered healthcare plan covering the owner and his beneficiaries) with Texas v. Alliance Employee Leasing Co., 797 F. Supp. 542 (N.D. Tex. 1992) (finding leasing company did not act directly or indirectly as employer under ERISA). E:\FR\FM\31JYR3.SGM 31JYR3 37512 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations with the employees of its client companies such that it is considered a ‘‘joint employer’’ for purposes of determining FMLA coverage and eligibility, enforcing the FMLA’s antiretaliation provisions, and in limited situations, providing job restoration.21 In the main, however, the FMLA regulations clarify that a ‘‘PEO does not enter into a joint employment relationship with the employees of its client companies when it merely performs . . . administrative functions,’’ such as ‘‘payroll benefits, regulatory paperwork, and updating employment policies.’’ 29 CFR 825.106(b)(2). The regulation makes clear that PEOs do not become joint employers simply by virtue of providing such services to client-employers. Furthermore, the Tax Increase Prevention Act of 2014, Public Law 113–295 (Dec. 19, 2014) required the IRS to establish a voluntary certification program for such PEOs (CPEO Program) as discussed in more detail below. The CPEO Program certifies PEOs that meet certain requirements within the Code and provides a level of assurance to small-business owners that rely on such a Certified Professional Employer Organization (CPEO) to handle their employment-tax issues. CPEOs are treated as employers under the Code for employment tax purposes with regard to remuneration paid to their customers’ employees under CPEO service contracts. Pursuant to its certification as a CPEO, a CPEO is solely liable for the employment tax withholding, payment, and reporting obligations with respect to remuneration it pays to work site employees (as defined in IRC 7705(e)).’’ 22 B. Overview of the Final Rule and Discussion of Public Comments jbell on DSK3GLQ082PROD with RULES3 1. In General The Department believes that providing additional opportunities for employers to join MEPs as a way to offer workplace retirement savings plans to their employees could, under the conditions in the final rule, offer many small businesses more affordable and less burdensome retirement savings plan alternatives than are currently available. MEPs provide another avenue for those employers that are reluctant to shoulder such burdens. In addition, the final rule will level the playing field for small-business employees by permitting them to have access to the lowest-cost funds, often reserved for employees in large-asset plans. Accordingly, the 21 29 CFR 825.106(b)(2), (e). IRC section 3511(a)(1). 22 See VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 Department is confident that the final rule will prompt some small businesses that do not currently offer workplace retirement benefits to offer such benefits. This will increase the number of employees enrolled in workplace retirement plans, thereby offering some of America’s workers better retirement savings opportunities and greater retirement security. Paragraph (a) defines the scope of the final rule. This paragraph provides that bona fide employer groups or associations and bona fide PEOs may act as ‘‘employer[s]’’ under ERISA section 3(5) for purposes of sponsoring a MEP. This interpretation is based upon the Department’s conclusion that such bona fide employer groups, associations, or PEOs can act ‘‘in the interest of ’’ their employer members in relation to a retirement savings plan. Although the term ‘‘multiple employer plan’’ can refer to a variety of different kinds of employee-benefit arrangements, this final rule addresses only two kinds of arrangements: Sponsorship of a MEP by either a group or association of employers, or by a PEO. The final rule is also limited to defined contribution plans, as defined in section 3(34) of ERISA. The final rule does not cover welfare benefit plans or other types of pension plans. Some commenters recommended expanding the scope of the Proposed Rule so that the final rule would cover other employee benefit plans. These commenters mentioned life, disability, and defined benefit pension plans in particular. At the same time, however, other commenters recommended that this rulemaking project remain limited to defined contribution plans. These commenters stated that different issues might arise under different employee benefit plan structures and different benefit options. These commenters preferred that the Department continue a discussion with interested parties on whether and how to implement a future regulatory expansion to cover these other employee benefit plans. After thoughtful review of these comments, however, the final rule is limited to defined contribution plans because the Department believes that consideration and development of any proposal covering other types of pension and welfare benefit plans or other persons or organizations as plan sponsors would benefit from public comments and additional consideration by the Department. 2. Open MEPs and Request for Information The Proposed Rule solicited comments on so-called ‘‘open MEPs’’ or PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 ‘‘pooled employer plans,’’ which generally are defined contribution retirement 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 ERISAcovered plans. The solicitation asked commenters who believe that these arrangements should be addressed in this or a future 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. Nearly half of the comments received addressed this issue, and the majority were supportive of the Department promulgating a rule that would facilitate these arrangements. Nonetheless, commenters had 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 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. A number of commenters believed commercial entities and financial services firms should be precluded from E:\FR\FM\31JYR3.SGM 31JYR3 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations sponsoring MEPs as an ‘‘employer’’ under section 3(5) of ERISA. A few commenters viewed the matter as being better suited for legislation, given the wide range of issues presented under ERISA and the Code. After reviewing the comments, the Department is persuaded that open MEPs deserve further consideration. The Department, however, does not believe that it has acquired a sufficient public record on, or a sufficiently thorough understanding of, the complete range of issues presented by the topic. In light of 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 solicit comments on a broad range of issues relating to open MEPs in a Request for Information (RFI) published elsewhere today in the Federal Register for possible future rulemaking and to defer rulemaking on open MEPs until after a fuller public record is developed. Because of its interest, however, in expanding opportunities for small businesses and working owners to participate in MEPs as soon as possible, the Department is publishing this final rule today, which is limited to bona fide groups or associations and bona fide PEOs that may act as employers that establish and maintain MEPs. jbell on DSK3GLQ082PROD with RULES3 3. Bona Fide Groups or Associations of Employers Paragraph (b) of the final rule contains the provisions defining what is a bona fide group or association of employers capable of establishing a MEP. 23 These provisions replace and supersede criteria in prior subregulatory guidance dealing with retirement plans and bona fide groups or associations of employers. The criteria in paragraph (b) distinguish bona fide group or association MEPs from retirement products and services offered by purely commercial pension administrators, managers, and record keepers. In a broad colloquial sense, it is possible to say that commercial service providers, such as banks, trust companies, insurance companies, and brokers, act ‘‘indirectly in the interest of’’ their customers, but that does not convert every service provider into an ERISAcovered ‘‘employer’’ of their customer’s employees. ERISA section 3(5) and 23 The term ‘‘bona fide’’ in the proposal refers to a group, association, or PEO that meets the conditions of the proposed regulation and, therefore, is able to be an ‘‘employer’’ for purposes of section 3(5) of ERISA. No inferences should be drawn from the use of this term regarding the actual bona fides of the group, association or organization outside of this context. VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 ERISA title I’s overall structure contemplate employment-based benefit arrangements.24 The Department’s authority to define ‘‘employer’’ and ‘‘group or association of employers’’ under ERISA section 3(5) does not broadly extend to arrangements established to provide benefits outside the employment context and without regard to the members’ status as employers.25 Thus, the criteria in paragraph (b) identify certain groups and associations that act as employers within the meaning of ERISA section 3(5), and distinguish those groups and associations from others that may not act as an ‘‘employer.’’ The provisions in paragraph (b) generally mirror those in the final AHP Rule that define what is a bona fide group or association capable of establishing an association health plan.26 These provisions have the same meaning and effect here, as they have there. It makes sense to have consistent provisions for AHPs and MEPs, because the Department is interpreting the same definitional provisions in both contexts and because many of the same types of groups or associations of employers that sponsor AHPs for their members will also want to sponsor MEPs. Accordingly, and for the sake of regulatory uniformity and simplicity, if a group or association of employers can establish a bona fide AHP under the AHP Rule, the group or association should also be able to establish a MEP under this final rule. Although commenters suggested changes to the provisions in paragraph (b) of the Proposed Rule, the final rule adopts the provisions essentially as proposed. In many instances, the rationale for declining a particular suggested change or amendment is the same or substantially similar to the reason the Department declined the same proposed provision in connection 24 The Department took the same position in the AHP Rule. 83 FR 28912, 28913 (June 21, 2018). 25 Id. at 28916. 26 The final rule does not contain provisions analogous to the healthcare nondiscrimination provisions of the AHP Rule because defined contribution retirement plans do not underwrite health risk and are not susceptible to the rating and segmentation pressures that characterize the healthcare marketplaces. Some defined contribution plans may offer lifetime income features, such as immediate or deferred annuities, which potentially implicate some degree of longevity risk. The Department, however, does not believe the potential presence of longevity risk in ancillary features of defined contribution MEPs warrants nondiscrimination provisions analogous to those of the AHP Rule. The Department also believes, and a few commenters expressly agreed with the Department, that any relevant nondiscrimination concerns are already addressed in the taxqualification provisions of the Code or other federal laws. PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 37513 with the AHP Rule. After thoughtful consideration, the Department has generally determined that the rationale for declining a particular suggested change or amendment in the AHP context is applicable in the MEP context, unless otherwise specified. Accordingly, the major comments on the proposal and provisions of the final rule are discussed below.27 a. Purpose of the Association Paragraph (b)(1)(i) of the Proposed Rule required that a group or association of employers have at least one substantial business purpose unrelated to offering and providing MEP coverage or other employee benefits to its employer members and their employees, even if the primary purpose of the group or association is to offer such coverage to its members. This provision helps ensure that the association is a bona fide association of employers, rather than merely a commercial arrangement or entity marketing retirement benefits and services to customers on a commercial basis. The ‘‘primary purpose’’ provision recognizes that it is perfectly legitimate for associations to form, in part, as a means of achieving the sorts of economies of scale, bargaining power, and administrative expertise that enable them to provide valuable benefits to their members, as long as they also serve another unrelated substantial business purpose. As an additional guidepost, the paragraph specifically provides that the ‘‘substantial business purpose’’ test is satisfied if the group or association would be a viable entity, even in the absence of sponsoring an employee benefit plan. A number of commenters believe this standard is too lenient. One commenter, who believes this standard may be abused by profit seeking enterprises, recommended a stricter standard providing that the primary purpose of the group or association could not be offering or providing retirement benefits. Other commenters with similar concerns recommended that the final regulation limit eligible groups or associations of employers to groups or associations that are not-for-profit organizations. One individual believes the standard is undefined, lacks meaningful limitations, and is perfunctory, and that it would allow an 27 Many commenters who support open MEPs made recommendations to substantially modify or eliminate some or all of the provisions in paragraph (b) of the final rule as a way of achieving an open MEP framework. Those comments are addressed in the aggregate above in section B 2 of this preamble, and in the related RFI published elsewhere in today’s Federal Register. They are not addressed in this section of the preamble. E:\FR\FM\31JYR3.SGM 31JYR3 jbell on DSK3GLQ082PROD with RULES3 37514 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations association to exist for the sole purpose of plan sponsorship. It remains the Department’s view, however, that requiring a substantial business purpose unrelated to offering employee benefits strikes an appropriate balance. It appropriately separates out the sorts of bona fide associations of employers that Congress intended to cover from solely commercial operations; promotes expanded access to MEPs; and minimizes the danger of abuse. The ‘‘substantial purpose’’ test is not a lenient standard, as reflected by the safe harbor for associations that would be viable even if they did not provide employee benefits. Thus, an entity that exists solely to sponsor a MEP would never qualify under the safe harbor. The importance of this safeguard should not be underestimated. In the Department’s experience under ERISA, many (if not most) regulated entities opt to meet the requirements of safe harbor provisions, even if more stringent than other legally defensible approaches, in exchange for the legal certainty that comes from safe harbor compliance. More importantly, the commenters overlooked the important modifier— ‘‘substantial’’—in the phrase ‘‘substantial business purpose.’’ For an organization’s business purpose other than offering employee benefits to be ‘‘substantial,’’ it must be of considerable importance to the group or association.28 Perfunctory or insubstantial purposes are clearly insufficient to meet the test. The viability safe harbor provides an indication of just how substantial the other purpose must be to meet the rule’s terms. The Department recognizes, however, that it may not always be easy to determine if an association would be viable if it did not offer employee benefits; that associations may serve multiple other purposes; and that the extent to which other purposes support the organization’s viability may vary from year to year based on all sorts of internal and external factors. Accordingly, a purpose other than MEP sponsorship does not have to be the lifeline of the organization in order to be ‘‘substantial.’’ It must, however, be of considerable importance to the existence of the organization—not merely ‘‘important,’’ but of ‘‘considerable’’ importance. The Department expects that, in practice, organizations may have numerous other 28 Compare, substantial, Oxford Dictionary (2019), https://en.oxforddictionaries.com (last visited Apr. 24, 2019) (of considerable importance) with, substantial, Merriam-Webster (2019) https:// www.merriam-webster.com (last visited Apr. 24, 2019) (consisting of or relating to substance). VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 purposes depending on the type and size of the organization. Ultimately what is ‘‘substantial’’ or ‘‘of considerable importance’’ to a group or association of employers depends on the facts and circumstances of the particular situation, taking into account the particular organization and its stated mission as reflected in its formal organizational structure and by-laws. But in each instance, the ‘‘other’’ business purpose(s) or activity must be substantial enough that the association could, under different circumstances, be a viable entity even in the absence of sponsoring a MEP. This is true even if the viability of the association as currently structured depends on offering and providing MEP coverage to its members. For example, if the group or association operated with an active membership before sponsoring a MEP, that would be compelling evidence of such a substantial business purpose, even if its primary purpose in the future becomes offering and providing MEP coverage to its members. The organization’s earlier operations demonstrate that the association could be viable in the absence of offering and providing MEP coverage, assuming the organization continues its pre-MEP activities. Importantly, the final rule includes conditions which, when combined with the ‘‘substantial business purpose’’ standard, will protect participants and beneficiaries from the concerns identified by the commenters. These other conditions include the requirement that the functions and activities of the group or association must be controlled by its employer members. For all of the foregoing reasons, paragraph (b)(1)(i) of the Proposed Rule is adopted without change. Commenters indicated that it may be a common practice for such groups or associations to form wholly owned nonprofit corporations for the sole purpose of establishing and maintaining benefit programs for their members. In these circumstances, the group or association has a mechanism to appoint the board of directors of the affiliated corporation from among members of the group or association, according to the commenters. Commenters requested clarification as to whether the substantial business purpose test precludes a group or association of employers from using a wholly owned affiliate to administer a MEP in this manner. They also pointed out that there are prudent business reasons for adopting this type of delivery structure, including that the affiliated corporation can focus exclusively on administering PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 retirement benefits and catering to the specialized needs of plan participants and retirees, while the group or association focuses on promoting and advancing the related, but different business purposes of the group or association. It is not inconsistent with the substantial business purpose test, in the Department’s view, if a group or association with a substantial business purpose unrelated to offering and providing MEP coverage or other employee benefits were to create a wholly owned subsidiary to administer a MEP, even if the subsidiary exists solely to administer the MEP. In this circumstance, the group or association’s substantial business purpose unrelated to the provision of employee benefits is not affected by its decision to create a subsidiary under its control to administer the MEP. This analysis also assumes that the other requirements of the final rule are satisfied, including the requirement that the group’s or association’s employer members that participate in the plan control the plan, both in form and substance. b. Groups or Associations of Individuals Paragraph (b)(1)(ii) of the Proposed Rule required that each employer member of the group or association participating in the plan be a person acting directly as an employer of at least one employee who is a participant covered under the plan. At least two commenters requested that the final regulation be expanded to cover groups or associations whose members include, not just employers and working owners, but also individuals who are not working owners and whose employers do not participate in the group or association. These commenters assert that membership in associations often includes individuals who are common law employees of employers that are not also members of the association. These associations desire to permit these individuals to enroll in the MEP, according to the commenters. The commenters argued that otherwise, the Proposed Rule unduly limits the ability of these associations to offer MEPs to all of their members, including small employers, independent contractors, and sole proprietors who could otherwise benefit from the final rule’s extended coverage of ‘‘working owners.’’ Regardless of the policy merits of these arguments, the Department’s authority to define ‘‘employer’’ and ‘‘group or association of employers’’ under ERISA section 3(5) does not broadly extend to arrangements established to provide benefits outside the employment context and without regard to the members’ status as E:\FR\FM\31JYR3.SGM 31JYR3 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations employers. Thus, the final rule, like ERISA section 3(5), is limited to employers, including working owners, because the Department cannot expand its definition beyond the statute’s scope. Accordingly, paragraph (b)(1)(ii) of the Proposed Rule is adopted in the final rule without change. jbell on DSK3GLQ082PROD with RULES3 c. Formal Organizational Structure Paragraph (b)(1)(iii) of the Proposed Rule required a group or association to have ‘‘a formal organizational structure with a governing body’’ as well as ‘‘bylaws or other similar indications of formality’’ appropriate for the legal form in which the group or association operates in order to qualify as a bona fide group or association. The Department received no comment letters on this provision. Commenters on the mirror provision in the AHP Rule generally supported these provisions on the basis that having such formalities will not only serve to clarify the rights and obligations of members of the group or association, but to promote accountability by enabling regulators and others to readily identify those parties who are responsible for operations, including the establishment and maintenance of the group health plan. These commenters suggested that the existence of formalized and robust organizational structures could be an important form of protection against fraud and insolvency. The Department agrees with the commenters that the requirements of paragraph (b)(1)(iii) promote accountability and provide support against fraud and insolvency. The provision also ensures that the organization is a genuine organization with the organizational structure necessary to act ‘‘in the interest’’ of participating employers with respect to the MEP as the statute requires. For these reasons and to maintain consistency with the AHP Rule, the Department adopts these provisions in this final rule without modification. d. Participating Employer Control Over the Group or Association Paragraph (b)(1)(iv) of the Proposed Rule required that member employers control the functions and activities of the group or association, and that the employer members that participate in the plan control the plan. Control must be present both in form and in substance. One commenter recommended that the final rule state that the control test may be satisfied indirectly through the regular nomination and election of directors, officers, or other similar representatives that control such functions and activities. The implicit concern raised VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 by this commenter is that the control test, as proposed, could be construed as requiring that participating employers be responsible for management and dayto-day operations of the group or association and MEP in order for the group or association to qualify as bona fide. The final rule does not require group or association members to manage the day-to-day affairs of the group or association or the plan in order for the group or association to qualify as bona fide. As has long been the case, the Department will consider all relevant facts and circumstances in determining whether the functions and activities of the group or association are sufficiently controlled by its employer members, and whether the employer members who participate in the group or association’s pension plan sufficiently control the group plan. In the Department’s view, the following factors, although not exclusive, are particularly relevant for this analysis: (1) Whether employer members regularly nominate and elect directors, officers, trustees, or other similar persons that constitute the governing body or authority of the employer group or association and plan; (2) whether employer members have authority to remove any such director, officer, trustees, or other similar person with or without cause; and (3) whether employer members that participate in the plan have the authority and opportunity to approve or veto decisions or activities which relate to the formation, design, amendment, and termination of the plan, for example, material amendments to the plan, including changes in coverage, benefits, and vesting. The Department ordinarily will consider there to be sufficient control if these three conditions are met.29 The same commenter suggested that the final rule could contain a deeming provision under which the control test would be considered satisfied if, in the 29 A number of commenters requested clarification or confirmation that the control test would be satisfied in an array of fact patterns involving different control structures, membership classifications, and participation privileges, including subgroup structures and associations of groups or associations. As stated elsewhere in this preamble, control must be present both in form and in substance, and whether control exists is determined under a facts and circumstances test. The Department declines in this preamble to address the application of the final rule to specific fact patterns. As noted above, the Department has procedures to answer inquiries of individuals or organizations affected, directly or indirectly, by ERISA as to their status under ERISA and as to the effect of certain acts and transactions. See ERISA Advisory Opinion Procedure 76–1 (FR Doc. 76– 25168). PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 37515 absence of actual control, it could be demonstrated that the group or association otherwise acts in the interest of its employer-members in relation to such a plan, including but not limited to demonstrating the existence of a fiduciary or contractual duty to act in the plan’s interest. Whether group or association members in fact have sufficient control of the functions and activities of the group or association for it to be considered bona fide, however, is entirely independent of and unrelated to whether the group or association’s key officials or board members are fiduciaries of the MEP. For these reasons, the Department declines to adopt the suggestions of these commenters. e. Commonality of Interest Paragraph (b)(1)(v) of the Proposed Rule required that the employer members of the group or association of employers have commonality of interest. Paragraph (b)(2)(i)(A) of the Proposed Rule recognized commonality if the employers are in the same trade, industry, line of business or profession. Alternatively, paragraph (b)(2)(i)(B) of the Proposed Rule recognized commonality if each employer has a principal place of business in the same region that does not exceed the boundaries of a single State or a metropolitan area (even if the metropolitan area includes more than one State). (i) Commonality Based on Size Commenters suggested the final rule should contain a new provision that finds sufficient commonality based on the ‘‘small’’ size of the participating employers, regardless of the small firms’ type of business or location. Some of these commenters would include in this category businesses with no employees other than the owner. According to the commenters, small employers often share unique bonds, interests, needs, and regulatory schemes, and may have significantly more commonality of interest than those in the same industry or region due solely to their size. The Department does not agree that this characteristic should be included as additional commonality of interest criteria in the final rule. A test that would treat all small businesses— including sole proprietors/working owners—nationwide as satisfying the standard based on size alone—without regard to their products, services, lines of business, or location—would be too open-ended to establish the requisite commonality of interest. Moreover, to the extent this class of business is not part of a single trade, industry, line of E:\FR\FM\31JYR3.SGM 31JYR3 37516 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES3 business, or profession, the geography standard for establishing a commonality of interest at paragraph (b)(2)(i)(B) of the final rule already provides this class of business with the ability to form Statewide and metropolitan area groups and associations that qualify as an employer for purposes of sponsoring a MEP. Accordingly, this suggestion was not adopted. Commenters on the RFI, however, are invited to include additional comments on this topic in the context of open MEPs. (ii) Commonality Based on Industry Paragraph (b)(2)(i)(A) of the Proposed Rule recognized commonality if the employers are in the same trade, industry, line of business, or profession. This reflects that employers in the same trade or industry, not only produce the same or similar products or services, but that they also tend to share, among other things, similar regulatory and market environments, economic trends, collective bargaining, and other similar business challenges that in turn may bear on the provision of benefits to their employees. Because of these shared traits, employers in the same trade or industry routinely associate in various industry or trade groups, and have done so historically. One commenter on the AHP Rule, for example, reported a membership of more than 7,000 trade associations. This commenter, which is an association of associations, stated that there is an organization or association for every industry and profession in the United States, and that over 60,000 are organized under Code section 501(c)(6) as trade associations and business leagues. As of 2017, the Internal Revenue Service recognized more than 63,000 Code section 501(c)(6) trade and professional associations.30 Commenters requested that the Department clarify whether businesses that support a particular industry, or that are allied with a particular industry, are considered to be ‘‘in the same industry’’ as that term is used in paragraph (b)(2)(i)(A) of the Proposed Rule. For example, one commenter notes that an association of home builders that includes builders and developers might also include a wide variety of professionals, artisans, and tradespeople, such as plumbers, carpenters, and electricians, who support the home building and development industry. In addition, another commenter notes that an association of owners and operators of vending machine companies might also 30 Internal Revenue Service Data Book, 2017, p. 57, Publication 55B Washington, DC (March 2018) (https://www.irs.gov/pub/irs-soi/17databk.pdf). VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 include vending machine manufacturers and vending machine suppliers, who support and are allied with the owners and operators of the vending machine companies. These commenters request clarification so that persons interested in forming MEPs would have more certainty regarding the permissible scope and membership classifications that would satisfy the final rule. Determinations of what is a ‘‘trade,’’ ‘‘industry,’’ ‘‘line of business,’’ or ‘‘profession,’’ as well as whether an employer fits into one or more these categories, are based on all the relevant facts and circumstances. In general, the Department intends for these terms to be construed broadly to expand employer and employee access to MEPs. Absent future guidance to the contrary, the Department ordinarily will not challenge any reasonable and good faith industry classification or categorization adopted by the group or association of employers. Nor will the Department challenge the inclusion of ‘‘support’’ or ‘‘allied’’ businesses as members of the group or association if they share a genuine economic or representational interest with the other members. The Department declines in the preamble to address the application of the final rule to specific fact patterns. The Department has procedures to answer inquires of individuals or organizations affected, directly or indirectly, by ERISA as to their status under ERISA and as to the effect of certain acts and transactions. See ERISA Advisory Opinion Procedure 76–1 (FR Doc. 76–25168). (iii) Commonality Based on Geography Paragraph (b)(2)(i)(B) of the Proposed Rule contained a geography test. It recognized commonality if each employer has a principal place of business in the same region that does not exceed the boundaries of a single State or a metropolitan area (even if the metropolitan area includes more than one State). Commenters recommended broadening the geography test in two different ways. Some commenters recommended expanding the geography test to allow regional commonality, rather than the state-based approach taken in the Proposed Rule. For this purpose, these commenters recommended using the regional divisions used by the U.S. Census Bureau, the districts used by the Federal Reserve, or the regions used by the Bureau of Economic Analysis. Alternatively, some commenters recommended expanding the geography test so that a MEP for employers in a metropolitan area that crosses two or more states would not need to exclude PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 employers in those states that are located outside the metropolitan area. The first recommendation would foster large regional MEPs, potentially increasing economies of scale compared to state-based MEPs. The second recommendation would help employers in suburban and rural areas of states that may not have access to a statewide MEP. Because of the similarities between these recommendations and other ideas being explored in the RFI on open MEPs published elsewhere in today’s Federal Register, the Department defers action on these recommendations. These recommendations provide a wide variety of other ways the Department could draw these lines, and the Department believes these issues would benefit from an additional opportunity for public comment. Accordingly, the Department includes a comment solicitation in the RFI on group or association MEPs covering larger geographic regions to ensure a fully developed public record before considering or taking any further action. Some commenters opposed the geography test due to its breadth. These commenters argued that this test in effect establishes fictional commonality among employers, because it is based on the simple fact that their businesses reside in the same state, regardless of the state’s size or population. To these commenters, shared geography alone is not an indicator of commonality of business or economic interests among a state’s inhabitants and should not be considered a sufficient nexus to establish commonality. These commenters fear that geography-based commonality will lead to the establishment of large MEPs by state or even regional associations with large numbers of participating members that have virtually nothing in common other than location and no meaningful industry, professional, or business ties. The commenters expressed concern that the geography test will enable and result in the establishment of purely commercial arrangements by promoters with only pecuniary interests in participating members and participating members with only tenuous and remote connections and ties among themselves, all of which ultimately could result in an increase in arrangements that are susceptible to financial mismanagement, insolvency, and lack of fiduciary oversight. These commenters, therefore, recommended eliminating the geography test. The Department does not agree with these commenters that geography alone has no binding or cohesive impact on businesses. It seems plain that employers in the same geography share E:\FR\FM\31JYR3.SGM 31JYR3 jbell on DSK3GLQ082PROD with RULES3 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations common interests concerning employees’ education and workforce development, taxation, transportation and commuting networks, the legal and regulatory environment, human capital pool, physical environment, local and state economic development partnerships, collective bargaining, and myriad other regional business trends and issues. That geography is a natural basis around which businesses organize themselves is evident in the number of state and local chambers of commerce in the United States, and their enrollment. There are roughly 4,000 chambers of commerce in the United States.31 The territorial nature of these organizations speaks directly to the correlation between geography and common interests. Nor does the Department agree that it makes sense to eliminate the geography test. A primary purpose of the geography test is to make it easier for employers to band together and collectively benefit from the economies of scale that come from aggregation. Eliminating the geography test would undermine this intended benefit. Moreover, the geography test in the final rule also aligns with the geography test in the AHP Rule, thus making it possible for statewide groups and associations to better serve their members by offering access to both health and retirement benefits. Consequently, eliminating the geography test would undermine that member service opportunity as well. Nor does the Department agree that narrowing the geography test is necessary to guard against fraud and abuse. The final regulation contains numerous safeguards to prevent large aggregations of completely unrelated employers in MEPs and potential mismanagement and fraud. The final rule, for example, prohibits financial services firms from being the group or association that establishes the MEP, requires that functions of the group or association be controlled by employer members, requires the group or association to have a substantial business purpose other than providing benefits, and makes clear that the parties administering the MEP must fully adhere to ERISA’s fiduciary standards. These provisions adequately guard against the concerns raised by the commenters, and ensure that the group or association will represent the common interests of its employer members. 31 According to the Association of Chamber of Commerce Executives (https://secure.acce.org/ about/chambers-of-commerce/). VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 One commenter noted that the Seventh Circuit invalidated a geography-based condition for ‘‘voluntary employees’ beneficiary associations’’ (VEBAs) described in section 501(c)(9) of the Code.32 While the commenter described that decision as applying in an analogous context, section 3(5) of ERISA and section 501(c)(9) of the Code have different language and purposes. In addition, the Department of Treasury and the IRS, rather than the Department of Labor, have jurisdiction over section 501(c)(9) of the Code.33 (iv) Commonality Provisions In General Other commenters generally opposed the commonality provisions (whether based on geography or industry) because they are not expressly set forth in the statute. These commenters recommended eliminating the commonality provisions entirely, and focusing instead only on whether the group or association acts ‘‘indirectly in the interest’’ of an employer in relation to the MEP, without regard to any requirement of a common economic or representational nexus. While these commenters’ arguments are not without force, the Department has decided for policy reasons not to simply eliminate these provisions. Even assuming that criteria other than commonality could satisfy section 3(5), the commonality provisions serve important policy goals in this context. First, keeping them in this final rule for MEPs establishes uniformity with the AHP Rule, thereby promoting consistent outcomes for employer-groups interested in sponsoring both health and retirement plans for their employees. Second, since employer groups often form on geographic and industry lines, the commonality provisions should be simple and natural to implement. Third, replacing the commonality provisions with looser or tighter criteria would likely require recalibration of the other conditions in paragraph (b) the final rule, all of which are designed to work in tandem with the commonality provisions. The more lenient test recommended by these commenters, for example, would require the Department to reevaluate and potentially expand the regulatory safeguards for MEPs, possibly to include new and potentially sophisticated and extensive compliance and enforcement mechanisms. This 32 Water Quality Association Employees’ Benefit Corporation v. United States, 795 F.2d 1303 (7th Cir. 1986). 33 In response to the Water Quality decision, the Internal Revenue Service issued a proposed regulation at 26 CFR 1.501(c)(9)–2, which sets forth a modified geographic limitation. PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 37517 would be especially true in the case of open MEPs sponsored by financial institutions. Before proceeding with a less restrictive test (e.g., open MEPs), which is a much larger step, the Department intends to evaluate the responses to the RFI on open MEPs published elsewhere in today’s Federal Register. These policy objectives more than adequately justify the commonality provisions in this final rule. Similar— albeit more restrictive—commonality provisions were present in decades of subregulatory guidance preceding and effectively superseded by this final rule. The prior subregulatory guidance, which was issued to address the ambiguity in section 3(5) of ERISA, used the commonality provisions essentially to help draw a line between commercial arrangements and associations that serve employers’ interests. But commonality provisions—whether in the narrower form as they existed in the subregulatory guidance or in the expanded form as they exist in this final rule—are not directly in or necessarily compelled by the statute. And their long-term use in the prior subregulatory guidance in no way restricts the Department’s ability now to modify them or even replace them altogether with different criteria. As a case in point, no commonality provisions in any form are present in the portion of this final rule governing bona fide PEOs because there the Department chose other criteria that adequately demonstrate when a ‘‘person’’ is able to adequately act in the employers’ interests in relation to a MEP. And, furthermore, unlike the prior subregulatory guidance, the final rule’s more expansive commonality provisions are the product of extensive notice and comment rulemaking, in which the Department considered many factors and provides herein ample justification for its decisions. In the end, the regulatory process of addressing the ambiguity in section 3(5) of ERISA invariably required some measure of policy-making and line drawing, and the lines in this final rule reflect the reasoned policy judgment of the Department. f. Provision Relating to Financial Services Firms Paragraph (b)(1)(vii) of the Proposal Rule generally prohibited an employer group or association from being a bank, trust company, insurance issuer, brokerdealer, or other similar financial services firm (including a pension record keeper or a third-party administrator) and from being owned or controlled by such a financial services E:\FR\FM\31JYR3.SGM 31JYR3 37518 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES3 firm. Nearly every commenter in favor of open MEPs opposed this prohibition. Their recommendation to remove this prohibition, when combined with their recommendations on other provisions, would achieve their favored outcome. Other commenters, however, supported this provision. Their support is based on the premise that, unlike traditional groups or associations of employers such as chambers of commerce or business leagues, which exist to serve and advance the needs of their participating members, financial services firms exist primarily to serve and advance the business interests of the company or concern, including its shareholders or other owners. Several of these commenters argued that financial services firms should not be in the business of providing MEPs because of conflicts of interest. This provision is consistent with the AHP Rule, which in relevant part, prohibits health-insurance companies from being treated as a bona fide group or association. In that context, the Department concluded that a construction of ‘‘employer’’ encompassing insurance companies that are merely selling commercial insurance products and services to employers would effectively read the definition’s employment-based limitation out of the statute. Applying a similar understanding of ‘‘group or association’’ of employers in the pension context as in the AHP context promotes simplicity and uniformity in regulatory structure. The final rule therefore applies a similar approach to employer groups or associations sponsoring MEPs in the final rule. The Department may revisit this issue depending on future action, if any, taken in response to the RFI on open MEPs published elsewhere in today’s Federal Register. 4. Bona Fide PEOs Although a number of commenters discussed the bona fide PEO provisions in the Proposed Rule, only a few comment letters actually addressed the substance of these provisions. Many commenters favoring open MEPs, for instance, raised the general concern that PEOs appeared to be given preferential treatment under the Proposed Rule. This observation came mainly from representatives of financial services firms, such as banks, insurance companies, and brokerage firms, who favor an open MEP structure. The Department does not agree that PEOs have been singled out for preferential treatment under the final rule. Rather, to the extent that PEOs stand in the shoes of their client employers for certain purposes and perform substantial VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 employment functions on their client’s behalf, the final rule merely recognizes that such PEOs are acting ‘‘indirectly in the interest of [their client] employers’’ under ERISA section 3(5) for purposes of sponsoring a MEP. Nevertheless, in response to these comments, as announced earlier in this document, elsewhere in today’s Federal Register the Department published a RFI soliciting comments on a broad range of issues relating to open MEPs for possible future rulemaking. The RFI will give these commenters an opportunity to provide additional comments on possible extensions of the final rule. The substantive comments received in response to the Proposed Rule are addressed below in relation to the relevant provisions of the final rule. a. The Four General Requirements Paragraph (c) of the Proposed Regulation included four requirements for a PEO to qualify as a ‘‘bona fide’’ PEO that may act ‘‘indirectly in the interest of [its client] employers’’ and, consequently, as an ‘‘employer’’ under ERISA section 3(5) for purposes of sponsoring a MEP covering the employees of client employers. The final rule adopts these four requirements essentially as proposed. Paragraph (c)(1)(i) requires the PEO to perform substantial employment functions on behalf of the client employers. Paragraph (c)(1)(ii) requires the PEO to have substantial control over the functions and activities of the MEP, as the plan sponsor, the plan administrator, and a named fiduciary. Paragraph (c)(1)(iii) requires the PEO to ensure that each client-employer participating in the MEP has at least one employee who is a participant covered under the MEP. Paragraph (c)(1)(iv) requires the PEO to ensure that participation in the MEP is limited to current and former employees of the PEO and of client-employers, as well as their beneficiaries. Regarding paragraph (c)(1)(i), a PEO’s assumption and performance of substantial employment functions on behalf of its client-employers is one of the lynchpins of the final rule. Just as commonality and control help to establish the appropriate nexus for groups or associations of employers under paragraph (b) of the final rule, the PEO’s performance of substantial employment functions for its client employers contributes significantly to the establishment of the requisite nexus for PEOs. Requiring the PEO to stand in the shoes of the participating client employers—by assuming and performing substantial employment functions that the client-employers PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 otherwise would fulfill with respect to their employees—is what distinguishes bona fide PEOs under the final rule from service providers or other entrepreneurial ventures that in substance merely market or offer clientemployers access to retirement plan services and products. This requirement applies a clear limiting principle to entities that can be said to be acting ‘‘indirectly in the interest of’’ another employer within the meaning of ERISA section 3(5). Importantly, a PEO’s status under the final rule does not make the PEO more or less likely to have an employment relationship (whether referred to as joint employment or otherwise) with the client-employer, for purposes of other laws or liabilities. What constitutes joint employment for purposes of other laws and liabilities is an independent inquiry wholly unaffected by a PEO’s potential status as an ‘‘employer’’ within the meaning of ERISA section 3(5). Whether a PEO qualifies as an ERISA section 3(5) ‘‘employer’’ under the ‘‘indirectly’’ provision has no effect on the rights or responsibilities of any party under any other law, including the Code or Fair Labor Standards Act, and neither supports nor prohibits a finding of an employment relationship in other contexts. The Department received a number of responses to its solicitation for comments on this issue. A number of commenters requested that the Department reiterate that participation in a MEP does not necessarily create a joint employment relationship by including language regarding joint employment in the operative text of the final rule. Another commenter asked that the Department state that MEP participation cannot be used as evidence of employee status for purposes of evaluating in any proceeding whether an individual is providing services as an independent contractor or employee. Although the Department recognizes the concern of commenters that participation in a MEP might create an inference under other laws, the Department’s authority in issuing this final rule is limited to its interpretation of ERISA. Consequently, the operative text of the final rule, like the NPRM, does not contain a specific reference to the existence of a joint employment relationship under other laws. Regarding paragraph (c)(1)(ii), a second important limiting principle in construing section 3(5)’s ‘‘indirectly in the interest of’’ clause is that the PEO must have substantial control of the functions and activities of the employee benefit plan at issue. This construction comports with the reference in ERISA E:\FR\FM\31JYR3.SGM 31JYR3 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations section 3(5) to a person acting as the employer ‘‘in relation to the plan.’’ Paragraph (c)(1)(ii) of the final rule requires the PEO to have substantial control over the functions and activities of the MEP, as the plan sponsor (within the meaning of section 3(16)(B) of ERISA), the plan administrator (within the meaning of section 3(16)(A) of ERISA), and a named fiduciary (within the meaning of section 402 of ERISA). Looking to the PEO’s substantial control of the MEP, as the sponsor, administrator, and fiduciary, is sensible given the ‘‘in relation to the plan’’ language of section 3(5) of ERISA. In response to comments, the final rule clarifies that because the PEO assumes these important statutory roles under ERISA, the PEO continues to have employee-benefit plan obligations to the employees of a client employer, as plan participants, even after that client employer no longer contracts with the PEO. The obligations of the PEO as the plan administrator and as a named fiduciary to the MEP’s participants and beneficiaries does not terminate with the conclusion of a client contract between the PEO and the client employer; instead, these obligations continue until participants are no longer covered by the plan and beneficiaries are no longer receiving benefits (e.g., the individuals have received a lump-sum distribution or a series of distributions of cash or other property which represents the balance of his or her credit under the plan, or a plan-to-plan transfer has occurred). As with pension plans in general, distributions are governed by the terms of the MEP as are plan-to-plan transfers. jbell on DSK3GLQ082PROD with RULES3 b. Substantial Employment Functions Safe Harbor Whether a PEO satisfies the requirement, in paragraph (c)(1)(i), to perform substantial employment functions on behalf of its client employers is generally determined based on the facts and circumstances of the particular situation. This approach gives PEOs maximum flexibility to structure their affairs and recognizes that all PEOs do not necessarily follow the same business model or provide the exact same services to client employers. It also provides PEOs room for innovations in their business models and service packages in the future. At the same time, however, the Department understands that some entities may prefer more regulatory certainty in ordering their business affairs than comes from a facts-and-circumstances test. For this reason, the final rule contains a regulatory safe harbor VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 separate from this facts-andcircumstances test. The safe harbor is contained in paragraph (c)(2) of the final rule and differs from the safe harbor structure in the Proposed Rule. The Proposed Rule contained two safe harbors, one for CPEOs within the meaning of Code section 7705, and another for PEOs that are not CPEOs (non-CPEOs). The change in structure stems from commenters who raised concerns regarding both the number and type of criteria required under the Proposed Rule. The commenters stated that the Proposed Rule’s list of nine criteria for non-CPEOs were, depending on the particular criterion, unnecessary, unrealistic, not entirely consistent with industry practice, not exactly reflective of how PEOs and their clients share employer functions, misaligned with many state licensing requirements, or out of step with the advisory role of PEOs. Without significant adjustments to this safe harbor, including eliminating at least two of the Proposed Rule’s nine criteria, the commenters asserted that many nonCPEOs would not qualify for the safe harbor. The commenters recommended adding a criterion that the PEO be licensed and registered in accordance with state law. With respect to the Proposed Rule’s CPEO safe harbor, the commenters essentially argued that the Proposed Rule required PEOs to satisfy too many employment-function criteria and that CPEO status alone should be sufficient, assuming the service contract between the client and the CPEO meets the requirements in the Code. One person asked for clarification on what would happen under the safe harbor if a CPEO temporarily lost its certification, and therefore its CPEO status, under the Code for minor infractions, procedural missteps, or reasons having nothing to do with substantive performance of employment functions on behalf of client employers. One commenter argued that the standards should be the same for both CPEOs and non-CPEOs, and not more or less favorable to one business model over the other. This commenter viewed the Proposed Rule as favoring CPEOs. In response to these comments, the Department streamlined the Proposed Rule’s safe harbor structure in the final rule. Unlike the Proposed Rule, which contained one safe harbor for PEOs that are CPEOs and a second safe harbor for PEOs that are non-CPEOs, the final rule contains only one safe harbor for all PEOs regardless of their status under the Code’s CPEO provisions. There may be sound business reasons behind a PEO’s decision to be a CPEO or not, and there may be equally sound business reasons PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 37519 behind a client employer’s decision to choose or not choose a CPEO. Nevertheless, the status of a PEO under the Code’s CPEO provisions is irrelevant to satisfying the safe harbor in the final rule; the relevant focus is the extent to which the PEO actually performs substantial employment functions on behalf of its client employers. The Department determined that the complexity of the Proposed Rule’s safe harbor could be reduced by reducing and combining the essential elements of the Proposed Rule’s two separate safe harbors into a single safe harbor that both CPEOs and non-CPEOs may rely on in connection with ERISA section 3(5). The Department reiterates that this is a safe harbor, intended to provide regulatory certainty. It is possible that a PEO could satisfy the statute’s general facts and circumstances test, even if it does not satisfy the safe harbor. Instead of nine criteria, the new safe harbor contains only four criteria, and instead of allowing the PEO the choice of selecting five from among the nine criteria, the new safe harbor requires that the PEO satisfy all four criteria. The four criteria selected were drawn from the types of services and functions PEOs routinely provide to clients, and with reference to, but not dependent on, the CPEO statutory standards. After carefully reviewing the public comments, the Department selected the four criteria that the commenters indicated are central to all PEO client contracts and that, in the Department’s view, clearly show the PEO acts indirectly in the interest of the clientemployer under ERISA section 3(5), in such a way and to such an extent that it sets the PEO apart from a mere service provider. The new safe harbor provides that a PEO will be considered to perform substantial employment functions on behalf of its client employers under the following circumstances: First, the PEO assumes responsibility for and pays wages to employees of its clientemployers that adopt the MEP, without regard to the receipt or adequacy of payment from those client employers. Second, the PEO assumes responsibility to pay and perform reporting and withholding for all applicable federal employment taxes for its client employers that adopt the MEP, without regard to the receipt or adequacy of payment from those client employers. Third, the PEO plays a definite and contractually specified role in recruiting, hiring, and firing workers of its client-employers that adopt the MEP, in addition to the client-employer’s responsibility for recruiting, hiring, and firing workers. As explained below, a E:\FR\FM\31JYR3.SGM 31JYR3 jbell on DSK3GLQ082PROD with RULES3 37520 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations PEO is considered to satisfy this standard if it recruits, hires, and fires, assumes responsibility for recruiting, hiring, and firing, or retains the right to recruit, hire, and fire workers of its client-employers that adopt the MEP, in addition to the client-employer’s responsibility for recruiting, hiring, and firing workers. Fourth, the PEO assumes responsibility for and has substantial control over the functions and activities of any employee benefits which the client contract with a client employer may require the PEO to provide, without regard to the receipt or adequacy of payment from those client employers for such benefits. All four of these criteria must be satisfied to meet the safe harbor. The Proposed Rule contained language providing that, depending on the facts and circumstances of the particular situation, even one of the safe harbor criteria alone may be sufficient to satisfy the general requirement that a PEO perform substantial employment functions on behalf of its client employers. The final rule does not include that language. The Department’s view is that it is not appropriate to state that any single safe harbor criterion alone can be relied upon to satisfy the general requirement that a PEO perform substantial employment functions on behalf of its client employers—all four safe harbor criteria are necessary given the broad scope of activity encompassed by the new safe harbor test and the nature of the four remaining safe harbor criteria. With respect to the third criteria, the first sentence of paragraph (c)(2)(iii) of the final rule requires that the PEO have a definite and contractually specified role in recruiting, hiring, and firing workers of its client-employers that adopt the MEP, in addition to the clientemployer’s responsibility for recruiting, hiring, and firing workers. This sentence recognizes that PEOs and their clientemployers share responsibilities and can also individually retain responsibilities. For example, a PEO client contract may provide that the client-employer shall recruit, hire, and fire based on the needs of the business, but allocate certain termination responsibilities to the PEO, such as in the event a worksite employee engages in employment discrimination that violates Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967, or the Americans with Disabilities Act of 1990. This sentence also recognizes that PEOs commonly have a role, for payroll and other human resource purposes, in hiring and firing workers of clientemployers, but client-employers VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 determine who works at their worksites and under what conditions, as necessary to conduct their business. The second sentence of paragraph (c)(2)(iii) of the final rule goes on to explain that the requirement to have a ‘‘definite and contractually specified role’’ in the first sentence would be satisfied if, pursuant to the contract, the PEO recruits, hires, and fires; assumes the responsibility for recruiting, hiring, and firing; or retains the right to recruit, hire, or fire workers of its clientemployers that adopt the MEP. This text does not necessarily require that PEOs actually interview and select the employees of client employers in the traditional common-law sense, in which a business hires employee based on the skillset and needs of the particular business, but it does require that PEOs, at a minimum, retain a right or obligation under contract to recruit, hire, and fire as necessary to fulfill the PEO’s responsibilities under the contract and applicable state law. For example, a PEO client contract may provide that following the clientemployer’s initial decision to hire an employee, that hiring decision does not become official until the PEO approves or ratifies the selection and finishes the administrative on-boarding process. Similarly, a PEO client contract may provide that client employer may not terminate a worksite employee until the PEO validates or approves the termination. The intent of paragraph (c)(2)(iii) is to accommodate the broad range of human resource services provided by and across the various PEO models, but at the same time to require a definite and contractually specified role for the PEO in the shared recruiting, hiring, and firing processes. c. PEOs and Working Owners As discussed below in section 5 (d) of this preamble, the final rule—like the Proposed Rule—does not extend the working-owner provisions to bona fide PEOs. d. PEOs and Health Plans Some stakeholders inquired whether a ‘‘bona fide professional employer organization’’ that is authorized under the final rule to sponsor a MEP for the employees of its client employers also would be able to establish and maintain a single plan, fund, or program of healthcare benefits for these same individuals. These stakeholders observed that the definition in section 3(5) of ERISA does not differentiate as to the type of benefit plan that an employer who meets the 3(5) definition may establish or maintain. Consequently, these stakeholders PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 maintain, if a PEO meets the conditions to be an employer for purposes of sponsoring a single pension plan, the PEO also should be able to rely on that status to sponsor a single group health plan. The stakeholders also argued that the same or similar policy reasons that support expanded access to retirement plan options for small employers also support expanded access to healthcare options for these same employers. Section 3(5) of ERISA, in relevant part, provides that the term ‘‘employer’’ means any ‘‘person’’ acting indirectly in the interests of an employer, in relation to ‘‘an employee benefit plan.’’ Although the statute is neutral on its face as to the type of employee benefit plan being established or maintained by the ‘‘person,’’ the final rule does not address when a PEO may be able to act as an employer for establishing or maintaining a single group health plan to cover the employees of the PEO’s client employers. Evidence suggests that some PEOs already offer health plans to the employees of their client employers and that this number could increase.34 But, as many commenters noted, health plan sponsorship may raise different issues and require different regulatory conditions than retirement plans.35 The topic of health plans is beyond the scope of this rulemaking project. The Proposed Rule did not address the topic of health plans in a meaningful way, or provide the opportunity for the public to provide comments. Accordingly, the PEO provisions in the final rule remain limited to defined contribution retirement plans. Until the Department takes additional regulatory or other action, a PEO interested in sponsoring a health arrangement for its client 34 See ‘‘2015 Employer Health Benefits Survey,‘‘ Section Fourteen: Employer Opinions and Health Plan Practices, Kaiser Family Foundation, September 2015, available at https://www.kff.org/ report-section/ehbs-2015-section-one-cost-of-healthinsurance/. (Five percent of firms with 3 to 499 workers offering health benefits through a PEO (Exhibit 14.8). Six percent of covered workers enrolled in health benefits at firms with 3 to 499 workers are enrolled in a plan offered through a PEO. The uptake was greatest for firms that had 10– 49 workers, with 8% of those firma offering health benefits through a PEO. 35 As described above, the Department recognizes the importance of expanding access to affordable group health care coverage to small employers and accordingly, published a final rule on Association Health Plans that permits a bona fide group or association of employers to establish a single group health plan for the employer members’ employees; and sets out specific requirements that such group or association must meet in order to be a 3(5) employer. 83 FR 28912 (June 21, 2018). One such requirement that is unique in the health plan context is that group health plan must not discriminate against employees in premiums, eligibility or benefits based on a health factor. E:\FR\FM\31JYR3.SGM 31JYR3 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations employers must look to the terms of the statute. 5. Working Owner Provision a. In General Paragraph (d) of the Proposed Rule expressly provided that working owners, such as sole proprietors and other self-employed individuals, may elect to act as employers for purposes of participating in a bona fide employer group or association as described in (b)(1) of the proposed regulation and also be treated as employees of their businesses for purposes of being able to participate in the MEP. To qualify as a working owner, a person would be required to work at least 20 hours per week or 80 hours per month, on average, or have wages or self-employment income above a certain level. This provision in the Proposed Rule is the same as the working-owner provision in the AHP Rule.36 Paragraph (d) of the Proposed Rule was limited to MEPs established and maintained by bona fide groups or associations of employers, and did not extend to MEPs established and maintained by PEOs. The public commenters supported this provision, which is adopted as proposed.37 jbell on DSK3GLQ082PROD with RULES3 b. Hours-Worked Provision Paragraph (d)(2) of the Proposed Rule included an ‘‘hours worked’’ provision that contained three essential requirements. First, the term ‘‘working owner’’ means any person who a responsible plan fiduciary reasonably determines is an individual who has an ownership right of any nature in a trade or business, whether incorporated or unincorporated, including a partner or other self-employed individual. Second, this person also must earn wages or selfemployment income from the trade or business for providing personal services to the trade or business. Third, this person must work ‘‘on average at least 20 hours per week or at least 80 hours per month providing personal services to the working owner’s trade or business.’’ At least one commenter requested clarification on how to apply the hours36 83 FR at 28964. In State of New York v. United States Department of Labor, 363 F. Supp. 3d 109 (D.D.C. March 28, 2019), the District Court vacated portions of the Department’s final rule on AHPs, including the working-owner provisions at 29 CFR 2510.3–5(e). The Department disagrees with the District Court’s ruling and an appeal has been filed. 37 Nothing in the final rule should be read to indicate that a business that contracts with individuals as independent contractors becomes the employer of the independent contractors merely by participating in the MEP with those independent contractors who participate as working owners, or by promoting participation in a MEP by those independent contractors, as working owners. VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 worked provision to workers that do not have a defined work schedule that results in a steady and predictable 20hour work week or 80-hour month. The precise issue in need of clarification for this commenter is whether plan fiduciaries are permitted to use two-year averages when determining if working owners meet the minimum-hoursworked requirement. According to this commenter, many workers in the construction industry have variable employment, which is dependent on the economy, weather, and other business and market factors. Working owners facing these predicaments may encounter periods of high demand for their services, during which they work greatly in excess of 80 hours per month, followed by periods of sustained low demand, during which they work significantly less than 20 hours per week. While the Department in this document does not render an opinion on the categorical appropriateness of using two-year averages, the final rule expressly permits the use of averaging by plan fiduciaries to determine whether working owners satisfy the hours-worked provision in the final rule. The Department adopted averaging language in the AHP Rule in order to accommodate these ‘‘variable workers’’ in that context, and today imports that same language into this final rule. Thus, this final rule too allows flexibility in making an hours-worked determination to address situations in which a working owner’s time performing services for his business varies due to various industry, seasonal, and other business and market factors. A working owner could demonstrate this by evidence of a work history or a reasonable projection of expected self-employment hours worked in a trade or business. While the final rule contains minimum weekly or monthly hours-worked requirements, it does not contain a maximum reference period over which averaging of hours is permitted or required. Since many of ERISA’s and the Code’s pension benefit provisions require annual recordkeeping and attention, many MEPs may decide to adopt annual or 12-month periods for averaging purposes out of administrative efficiency, although others may not. Ultimately, whether any particular maximum reference period is appropriate, however, is a matter within the discretion of the plan fiduciary taking into account the plan document and facts and circumstances of the particular situation. The exercise of this discretion by the plan is subject to the general fiduciary requirements of section 404(a) of ERISA. Accordingly, PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 37521 the final rule adopts paragraph (d)(2)(iii) of the Proposed Rule without change. c. Wages or Self-Employment Income Paragraph (d)(2) of the Proposed Rule included an ‘‘earned income’’ alternative to the ‘‘hours worked’’ provision. Under the earned-income alternative, the working-owner must have ‘‘wages or self-employment income from such trade or business that at least equals the working owner’s cost of coverage for participation by the working owner and any covered beneficiaries in any group health plan sponsored by the group or association in which the individual is participating or is eligible to participate.’’ For this purpose, the definitions of ‘‘wages’’ and ‘‘self-employment income in Code sections 3121(a) and 1402(b) (but without regard to the exclusion in section 1402(b)(2)), respectively, would apply. Several commenters were confused by the earned-income provision. Some thought it was unnecessary in light of the hours-worked provision. These commenters apparently understood the earned-income provision to be a requirement in addition to the hoursworked condition, and not an alternative. Other commenters did not understand the connection between health care premiums or cost of coverage and participation in a MEP. The commenters recommended eliminating this provision because they either thought the provision was a mistake or saw no need for it. The earned-income provision is an alternative to the hours-worked provision. These two separate provisions are disjunctive conditions, not conjunctive requirements. Thus, working owners may choose whichever test is more appropriate for their circumstances. Further, this provision offers administrative ease and convenience to the administrator of the MEP. This is because the Department expects many groups or associations of employers to offer to their members both AHPs and MEPs and, if the working owner makes enough money to be considered both an employer and employee under the AHP Rule, the working owner may also be considered both an employer and an employee for participating in a MEP. In finalizing the AHP Rule, the Department concluded that using the cost of coverage of benefits under the AHP was a meaningful metric to ensure that the working owner has a legitimate trade or business, keeping in mind that ERISA governs benefits provided in the context of a work relationship as opposed to the mere marketing of insurance to E:\FR\FM\31JYR3.SGM 31JYR3 37522 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES3 individuals unrelated to their status as employees in a trade or business and any benefits they obtain through that status. Unlike healthcare coverage, participation in a MEP does not have a specific dollar amount associated with the benefits; thus, there is no minimum cost of participation, making reference to the cost of healthcare coverage a proxy in those cases where the group or association has such a plan. For these reasons, the earned-income provision was not eliminated. Section 401(c) of the Code provides rules for when a self-employed individual may participate in a qualified retirement plan. The Department solicited comments on whether there might be circumstances under which a ‘‘working owner’’ as defined in paragraph (d)(2) of the Proposed Rule might nonetheless fail to be described in section 401(c) of the Code, and if so whether the two provisions could and should be directly aligned. Comments were specifically requested on whether the final rule should limit the definition in paragraph (d)(2) to self-employed individuals described in section 401(c) of the Code to avoid such failures. The Department received no comments indicating a need for or in support of such a limitation. One commenter opposed such a change. This commenter was concerned about the complexity associated with making determinations under section 401(c) of the Code and imposing such an obligation on plan fiduciaries of MEPs. In light of this comment, no changes in this regard were made to the final rule. However, the Department of the Treasury has advised that the inclusion of an individual who is not a common law employee or treated as an employee under section 401(c) would affect the qualified status of the plan. Also, they advised that a plan covering an owneremployee is qualified only if it limits contributions with respect to the owneremployee in accordance with section 401(d) of the Code. d. Extending Working Owner Provision to PEOs The final rule does not extend the working-owner provision to MEPs sponsored by PEOs under paragraph (c). Thus, a working owner’s trade or business must have at least one common law employee to participate in a PEO’s MEP under paragraph (c) of the final regulation. The Department understands that working owners without employees generally would not have a need for the employment services of PEOs, such as payroll, compliance with federal and state workplace laws, and human resources support. Thus, a trade or VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 business without employees would not seem to have a genuine business need for a relationship with a PEO. Accordingly, the working-owner provision of the final rule only applies for purposes of participation in MEPs sponsored by a bona fide group or association. One commenter, however, indicated there may be circumstances in which a working owner without common law employees has a genuine need to be in a PEO’s MEP. This occurs if the working owner has had common law employees and used a PEO, including joining the PEO’s MEP, but was later unable to afford to continue to employ others and did not want to stop participating in the PEO plan, according to the commenter. The Department declines to expand the working-owner provision in paragraph (d) for this situation. In this situation, the working owner is still a participant covered under the plan with respect to his individual account balance because he is or may be eligible to receive a benefit, without regard to whether the working-owner continues his contract with the PEO. This status continues until the working-owner-participant is no longer covered by the plan (e.g., receives a lump-sum distribution or a series of distributions of cash or other property which represents the balance of his or her credit under the plan, or a plan-to-plan transfer has occurred).38 Thus, the working owner in this situation is treated the same as a former employee of a client employer that has an ongoing contract. The clause ‘‘employees and former employees of former client employers who became participants during the contract period between the PEO and former client employers’’ was added to paragraph (c)(1)(iv) of the final rule to make this point clear. 6. Miscellaneous Topics a. ERISA Fiduciary Status and Responsibilities of Sponsor and Participating Employers The Department received multiple comments on the application of ERISA’s fiduciary rules to bona fide groups and associations, PEOs, and participating employers. Several commenters, for instance, asked the Department to provide guidance on fiduciary liabilities and responsibilities of a bona fide group or association or PEO that sponsors a MEP and clarify that any individual charged with the operation or management of a MEP is considered a fiduciary under ERISA. These commenters stressed that it is important PO 00000 38 29 CFR 2510.3–3(d)(2)(ii). Frm 00016 Fmt 4701 Sfmt 4700 for groups and associations and PEOs that sponsor a MEP to understand that they are obligated to protect the interests of the participants of the plan, and may be held individually liable if they fail to do so. Other commenters, by contrast, focused on participating or client employers; these commenters requested clarification of a participating or client employer’s duty to prudently select and monitor the MEP in which the employer’s employees participate. A MEP offered by a bona fide group or association, or by a PEO, under the final rule is subject to all of the provisions under title I of ERISA applicable to employee pension benefit plans, including the fiduciary responsibility and prohibited transaction provisions in part 4 of ERISA. Bona fide groups or associations and PEOs that sponsor a MEP assume and retain responsibility for operating and administering the MEP, including ensuring compliance with these requirements.39 As an operational matter, the MEP’s sponsor—and not the participating employers—would generally be designated as the plan administrator responsible for compliance with the requirements of title I of ERISA, including reporting, disclosure, and fiduciary obligations. Under this structure, the individual employers would not each have to act as plan administrators under ERISA section 3(16) or as named fiduciaries under section 402 of ERISA. Although participating employers would retain fiduciary responsibility for choosing and monitoring the arrangement and forwarding required contributions to the MEP, a participating employer could keep more of its day-to-day focus on managing its business, rather than on its plan.40 In the MEP context, although a participating employer would no longer have the day-to-day responsibilities of plan administration, the business owner would still need to prudently select and monitor the MEP sponsor and get periodic reports on the fiduciaries’ management and administration of the MEP, consistent with prior Department guidance on MEPs.41 39 Association Health Plan Final Rule, 83 FR 28912, 28937 (June 21, 2018). 40 Association Retirement Plans and Other Multiple-Employer Plans Proposed Rule, 83 FR 53534, 53535 (October 23, 2018). 41 29 CFR 2509.2015–02, Interpretive Bulletin Relating to State Savings Programs that Sponsor or Facilitate Plans Covered by the Employee Retirement Income Security Act of 1974 (‘‘As a state-sponsored multiple employer plan (‘‘state MEP’’), this type of arrangement could also reduce overall administrative costs for participating employers in large part because the Department would consider this arrangement as a single ERISA plan. Under a state MEP, each employer that chose E:\FR\FM\31JYR3.SGM 31JYR3 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES3 One commenter suggested that the Department should establish a ‘‘fiduciary checklist’’ to assist small employers in discharging their selection and monitoring duties. According to this commenter, the checklist could encourage or require employers to: (1) Consider at least three plans; (2) examine how long the plan has been in existence; (3) review how many other employers and employees are actively enrolled; (4) consider the investment options and all employer and participant fees; and (5) receive and review a report on plan operations and periodically assess employee satisfaction and complaints at least annually. The Department recognizes that small employers often benefit from compliance guides of the type identified by the commenter. To assist business owners in carrying out their responsibilities under ERISA to prudently select and monitor plan service providers generally, the Department’s EBSA, several years ago, published a compliance guide entitled ‘‘Tips for Selecting and Monitoring Service Providers for your Employee Benefit Plan.’’ The Department’s EBSA maintains this document on its website and updates it periodically. The Department agrees with this commenter that small businesses may benefit from a checklist or similar guidance on how to discharge their duties to prudently select and monitor the MEP sponsor. Accordingly, the Department will review and possibly update the Tips document taking into consideration the five factors identified by the commenter. One commenter requested that the Department clarify that the duties of selection and monitoring are essentially the same for employers that decide to participate in a particular MEP as they are for employers that sponsor their own plans and delegate various plan investment and administrative functions to other plan fiduciaries. Otherwise, according to this commenter, any deviation from the existing framework for allocating fiduciary responsibility in the MEP context may create an incentive for employers with existing plans to transition to a MEP for the sole purpose of limiting their liability. One to participate would not be considered to have established its own ERISA plan, and the state could design its defined contribution MEP so that the participating employers could have limited fiduciary responsibilities (the duty to prudently select the arrangement and to monitor its operation would continue to apply). The continuing involvement by participating employers in the ongoing operation and administration of a 401(k)type individual account MEP, however, generally could be limited to enrolling employees in the state plan and forwarding voluntary employee and employer contributions to the plan.’’). VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 commenter additionally requested that the Department make it clear that, apart from a duty to select and monitor the operations of the MEP, if the employer selects any investment options, the employer must act and be liable in a fiduciary capacity for this act. Generally speaking, the process of selecting and maintaining service providers will vary depending on the plan and services to be provided. Thus, the commenters’ questions are too generic to be answered in a vacuum. Nonetheless, the following principles are clear. The bona fide group or association typically, or the PEO always, is responsible for prudently selecting and monitoring the service providers of the MEP they hire, including any fiduciary service providers. In comparison, the business owner must prudently select and monitor the MEP sponsor and get periodic reports on the fiduciaries’ management and administration of the MEP. Finally, the decision to include or delete funds from a plan’s investment lineup, or to invest plan assets on the participant’s behalf in a particular fund on that lineup, is a fiduciary decision, subject to the fiduciary provisions in Title I of ERISA. b. Need for Reporting and Disclosure Changes (i) In General The Proposed Rule solicited comments on whether any reporting or disclosure requirements are needed to ensure that participating employers, participants, and beneficiaries of MEPs are adequately informed of their rights and responsibilities with respect to MEP coverage and that the public has adequate information regarding the existence and operations of MEPs. Most responsive comments stated either that no new substantive requirements are needed, or that the Department should delay rulemaking on this subject until there is more experience with the types of MEPs described in this final rule.42 The Department agrees with this position and, therefore, the final rule does not contain modifications to the Department’s reporting and disclosure requirements. Several commenters asked the Department to confirm that the group or association or PEO sponsoring the MEP, 42 The Department received several comments regarding electronic disclosures. Although electronic disclosures, like MEPs, were the subject of Executive Order 13847, they are part of a separate rulemaking process. The Department also received a comment regarding recommended disclosure requirements in an ‘‘open MEP’’ or ‘‘pooled employer plan’’ context. As noted earlier in this preamble, open MEPs are the subject of a separate RFI and are not part of this final rule. PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 37523 and not the participating employers, are generally responsible for the participant disclosures required by part 1 of ERISA. The Department confirms that the administrator of the MEP—and not the participating employers—is responsible for discharging the reporting and disclosure requirements under part 1 of ERISA. In most cases, the group or association sponsoring the MEP, and in all cases the PEO, will be the ERISA 3(16) plan administrator. (ii) PEOs and Lists of Participating Employers Several commenters focused on the public’s ability to obtain access to a MEP’s annual report, including information regarding the identity of individual participating employers or the employer of a single participant. One commenter, for instance, requested that the administrator of a MEP, such as a PEO, be permitted to file the portions of the Form 5500 annual report that relate to participating employers on a confidential or redacted basis. In this commenter’s view, PEOs will be less likely to sponsor a MEP (and participants will suffer) if competitors in the PEO marketplace are able to use publicly available information from the Form 5500 for targeted marketing aimed towards the PEO’s client employers identified in the annual report. Conversely, other commenters favored public access to reported information and recommended that the Department make it even easier to locate and retrieve information about specific participating employers. For example, some commenters requested that the Department’s website be modified to enable searches based on the name or EIN of a participating employer, rather than the name or EIN of the sponsor. One commenter, representing a state’s department of child support services, stated that such agencies frequently need improved search methods to locate assets of non-custodial parents in order to pursue state domestic relations orders. This commenter believed that reporting should be strengthened to permit searches based not only on the name or EIN of the participating employer, but also based on the name of the plan participant. After reviewing the comments, the Department concluded that the subject matter is outside the scope of this rulemaking project. The Department may address some or all of this topic in a different rulemaking project in the future, or through subregulatory guidance, but does not otherwise address the comments in this final rule. E:\FR\FM\31JYR3.SGM 31JYR3 jbell on DSK3GLQ082PROD with RULES3 37524 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations (iii) Fee and Conflict of Information Disclosures Commenters asked whether each participating employer must receive the disclosures required by section 408(b)(2) of ERISA and the regulations thereunder. ERISA section 408(b)(2) and 29 CFR 2550.408b–2(c) require that certain service providers to pension plans disclose to a ‘‘responsible plan fiduciary’’ information about service providers’ compensation and potential conflicts of interest. The regulation defines responsible plan fiduciary as ‘‘a fiduciary with authority to cause the covered plan to enter into . . . the contract or arrangement.’’ Typically, the responsible plan fiduciary is the plan administrator (within the meaning of section 3(16) of ERISA) or named fiduciary (within the meaning of section 402 of ERISA) of the MEP, and not the participating or client employer. Thus, to the extent participating or client employers in a MEP do not have such authority, the Department is of the view that section 408(b)(2) and the regulations thereunder do not require the disclosure of this information to them. At the same time, however, if the bona fide group or association or PEO itself is a covered service provider (within the meaning of 29 CFR 2550.408b–2(c)) with respect to the MEP, the group or association or PEO must furnish the specified information about its compensation and potential conflicts of interest to the participating or client employer at the time the participating employer or client employer is considering adopting or subscribing to the MEP and thereafter at intervals specified in the regulation. This information must be disclosed because when the participating or client employer adopts the MEP by executing the participation agreement or subscription document, the participating or client employer effectively is acting as a responsible plan fiduciary with respect to the group or association or PEO. In addition, participating or client employers have a duty under section 404 of ERISA to periodically monitor ongoing management and administration of the MEP to ensure the prudence of continued participation. Carrying out this duty may be aided by the periodic receipt from the administrator or named fiduciary of the MEP of information similar to that described in 29 CFR 2550.408b–2(c), with respect to other of the MEP’s service providers.43 If the administrator 43 For example, GAO has emphasized the need for small businesses ‘‘to understand plan fees in order to help participants secure adequate retirement VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 or named fiduciary were to refuse to provide such information to a participating employer, either periodically or on request, such failure must be taken into account by the participating employer when deciding whether to continue participating in the MEP and, in and of itself, may justify or require a decision to cease participation. c. Termination or Severance Situations Several commenters asked for guidance on severance or termination situations. Specifically, these commenters asked about situations where the participating employer or client employer severs or terminates its relationship with the bona fide group or association or the bona fide PEO, respectively, after having adopted or joined the MEP. The commenters stated that in these situations, while the relationship between the participating employer or client employer and the bona fide group or association or the bona fide PEO is severed, the MEP itself does not necessarily terminate and, consequently, there may be no distributable event on which to authorize distributions of benefits to the employees of the employer. These commenters asked for guidance on whether these benefits may or must remain in the MEP, or whether they may or must be distributed or transferred to another plan, and for clarification of the status of the MEP as a single plan following the severance or termination. The commenters gave a few examples of likely severance or termination situations. In one example, an employer is a member of a local chamber of commerce, which meets the requirements to be a bona fide group or association, and the employees of this employer participate in the MEP sponsored by the chamber of commerce. The employer terminates its membership with the local chamber of commerce in favor of a statewide chamber of commerce. The employer ceases to have any control over the local chamber of commerce on cancelation of membership, despite the fact that such control is required under paragraph (b)(1)(iv) of the final rule. In another example, a different employer enters into a contract with a PEO that meets the requirements to be a bona fide PEO. This employer had 10 common law employees when it entered the contract with the PEO and enrolled the employees in the MEP sponsored by the savings. See GAO Testimony before the Senate Comm. on Health, Education, Labor and Pensions, Statement of Charles A. Jeszeck, GAO Director of Education, Workforce and Income Security, GAO– 13–748T (July 16, 2013) at 16, https://www.gao.gov/ assets/660/655889.pdf. PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 PEO. Years later, after a business downturn, the employer must terminate the 10 employees and the only remaining worker is the owner. As a sole proprietor, the business no longer needs the services of the PEO and terminates the contract with the PEO. After termination of the contract, the PEO no longer performs substantial employment functions on behalf of this employer, despite the fact that the performance of substantial employment functions is required under paragraph (c)(1)(i) of the final rule. Whether the benefits of the employees of a severing or terminating employer may or must remain in the MEP, or whether they may or must be distributed or transferred to another plan should be memorialized in the plan document.44 Nevertheless, when a participating employer or client employer severs or terminates its relationship with a bona fide group or association or PEO, the severance or termination ordinarily extinguishes the nexus that supports the conclusion that the group or association or PEO is acting as the ‘‘employer’’ under section 3(5) of ERISA for purposes of sponsoring a plan for the employees of the participating employer or client employer. In this situation, therefore, the group or association or PEO and the participating employer or client employer will commonly want to implement a spin-off of the assets and liabilities of the employees of the severing or terminating employer, or a plan-to-plan transfer of those assets and liabilities to a separate plan meeting the requirements of the Code, if applicable, as soon as is reasonably practicable. Importantly, when a participating employer or client employer severs or terminates its relationship with a bona fide group or association or PEO, the severance or termination does not extinguish any fiduciary obligations that the group or association or PEO owes to these participants as the plan administrator and named fiduciary of the MEP; rather, these obligations persist until the participants are no longer covered by the MEP. Pending a 44 Information Letter to John N. Erlenborn from Dennis M. Kass, Assistant Secretary, Pension and Welfare Benefits Administration, Department of Labor (March 13, 1986) (‘‘we believe that the decision of whether to establish a successor plan, and if so, the type of such a plan, are clearly business decisions not subject to Title I of ERISA. As in the case of the decision to terminate, the decision to establish a successor plan involves the exercise of wholly voluntary settlor functions. Similarly, decisions about the design and provisions of any successor plan are not subject to Title I.’’). Decisions on whether benefits may or must remain in the MEP, or whether they may or must be distributed are subject to applicable Code provisions. E:\FR\FM\31JYR3.SGM 31JYR3 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES3 spin-off or transfer, the MEP generally continues to constitute a single plan for purposes of title I of ERISA. But if the arrangement continues to operate in virtually the same manner as before the severance or termination (including the making of contributions by the participating employer or client employer that severs or terminates its relationship) and no party (the group or association, the PEO, or the participating employer or client employer, as applicable) takes action toward a spin-off or transfer within a reasonable timeframe following the severance or termination, the MEP will no longer constitute a single plan for purposes of ERISA. In this situation, the participating employer or client employer (i.e., the entity that severed or terminated its relationship with the group or association or PEO, failed to promptly implement a spin-off or transfer, and nevertheless continued the arrangement in virtually the same manner as before the severance or termination) will be considered to have established and maintained its own separate employee benefit plan. The group or association or PEO will be considered to be acting as a service provider to the plan of the former participating employer or client employer. The MEP—exclusive of the severed employer but inclusive of all remaining non-severed participating employers or client employers—will continue to constitute a single plan for purposes of title I of ERISA. d. Plan Governance Issues Commenters suggested that the Department consider the establishment of various new regulatory provisions governing certain aspects of MEP governance and administration. For example, one commenter recommended that the Department establish minimum standards in order for a person to sponsor and administer a MEP, including a minimum number of years of experience in providing retirement benefits, minimum staff qualifications, and minimum capital reserves. The Department believes it has appropriately addressed issues of MEP governance and administration to the extent such issues fall within the scope and subject of this rulemaking, the definition of ‘‘employer’’ in section 3(5) of ERISA. The Department, however, will give further consideration to these recommendations in connection with the comments received in response to the RFI on open MEPs and any further rulemaking in this area. One commenter argued that MEPs should be required to have fair rules that apply to all employers, participants VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 and beneficiaries. That commenter suggested that permitting MEPs to maintain multiple different rules for different employers or classes of employers will increase complexity and costs for all. As indicated, a MEP would be a single plan under title I of ERISA. As such, ERISA would apply to the MEP in the same way that ERISA applies to any employee benefit plan, but the MEP sponsor, typically acting as the plan’s administrator and named fiduciary, would administer the MEP.45 This person will have considerable discretion in determining, as a matter of plan design or a matter of plan administration, how to treat the different interests of the multiple participating employers and their employees. Accordingly, this person, in distributing, investing, and managing the MEP’s assets, must be neutral and fair, dealing impartially with the participating employers and their employees, taking into account any differing interests.46 For example, when the fiduciary of a large MEP uses its size to negotiate and secure discounted prices on investments and other services from plan services providers, as is generally required by ERISA, the fiduciary is bargaining on behalf of all participants regardless of the size of their employer, and should take care to see that these advantages are allocated among participants in an evenhanded manner. Treating participating employers and their employees differently without a reasonable and equitable basis would raise serious concerns for the Department under sections 404(a)(1)(A) and (B) of ERISA. One commenter recommended that the final rule govern the number of designated investment alternatives under the MEP. One commenter recommended that the final rule should provide that if an employer fails to pay employee or employer required contributions, the MEP (or the Federal or State licensed investment provider) 45 As noted elsewhere, in the case of a PEO MEP under paragraph (c) of the proposal, the PEO, as the plan sponsor, must always act as the plan’s administrator (within the meaning of section 3(16)(A)) and a named fiduciary (within the meaning of section 402 of ERISA) of the MEP. 46 See Field Assistance Bulletin No. 2003–03 (addressing what rules apply to how expenses are allocated among plan participants in a defined contribution pension plan). See also Varity Corp. v. Howe, 516 U.S. 489, 514 (1996) (‘‘The common law of trusts recognizes the need to preserve assets to satisfy future, as well as present, claims and requires a trustee to take impartial account of the interests of all beneficiaries.’’); Restatement (Second) of Trusts section 183 (‘‘If a trust has two or more beneficiaries, the trustee, in distributing, investing, and managing the trust property, shall deal impartially with them, taking into account any differing interests.’’) PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 37525 should be required to freeze the account and notify the employer, employee and the Department. Limiting investment options and remedying delinquent contributions are unrelated to the definition of ‘‘employer’’ in section 3(5) of ERISA. Accordingly, the Department considers these recommendations to be beyond the scope of this rulemaking. Finally, many commenters recommended that the final rule expressly permit MEPs to use electronic media as the default method of furnishing disclosures to participating employers, plan participants, and beneficiaries receiving benefits. Although improving the effectiveness of retirement plan disclosures, including possibly through the broader use of electronic delivery, is the subject of a different section of the MEP Executive Order (E.O. 13847), the Department intends to address this topic as part of a separate rulemaking process. e. Corporate MEPs The Proposed Rule solicited comments on whether the final rule should address the status of so-called ‘‘corporate MEPs,’’ a term not defined in ERISA. 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 414(b), (c), and (m) of the Code. In response, one commenter provided an example of what it described as a very 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, the commenter stated that it does not appear that A and B would meet the commonality of interest conditions in the Proposed Rule 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, 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 E:\FR\FM\31JYR3.SGM 31JYR3 37526 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations 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.47 On the record established thus far, however, the Department lacks a meaningful basis on which to determine the precise level of ownership, below the ownership thresholds of the aggregation rules in sections 414(b) and (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. The Department, therefore, has decided to explore this topic further in the RFI, published elsewhere in today’s Federal Register. jbell on DSK3GLQ082PROD with RULES3 f. Interpretive Bulletin 2015–02 This final rule clarifies, through regulation, when an employer group or association, or a PEO that meets certain conditions, may sponsor a single MEP under title I of ERISA (as opposed to providing an arrangement that constitutes multiple retirement plans). Based on its comprehensive review, the Department, therefore, is finalizing this regulation interpreting the term ‘‘employer’’ for purposes of ERISA section 3(5). A number of commenters expressed concern regarding the effect the rule, as proposed, could have on other guidance. Commenters specifically indicated that they were concerned with the effect of the proposed rule on State-sponsored MEPs subject to Interpretive Bulletin 2015–02. (29 CFR 2509.2015–02). Nothing in this final rule affects prior guidance regarding how a State may act as an employer in relation to an employee benefit plan. Instead, this final rule provides additional regulatory certainty regarding when a group or association, or a PEO, acts ‘‘indirectly in the interest of an employer’’ in relation to a defined contribution multiple employer plan for purposes of ERISA section 3(5). 47 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 U.S.C. 1060(c). VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 Whether a person acts ‘‘indirectly in the interest of an employer . . . in relation to an employee benefit plan’’ for purposes of ERISA section 3(5) depends on the facts and circumstances, including the type of employee benefit plan the entity is acting in relation to, and the type of entity that is acting indirectly in the interest of an employer. Based on its review, the Department believes that this final rule will facilitate the adoption and administration of MEPs and will expand access to workplace retirement plans. g. Plans Without Employees The final rule contains an amendment to a different regulation, at 29 CFR 2510.3–3, to support the new working owner provision in paragraph (d) of the final rule. That regulation states the general principle that the term ‘‘employee benefit plan’’ shall not include any plan, fund, or program under which no employees are participants covered under the plan. The amendment makes it clear that this general principle does not stand in the way of working owners who want to participate in MEPs. The Proposed Rule sought comments on whether this fix would be sufficient or whether additional or different regulatory amendments should be made to confirm or clarify the long-established exclusion from ERISA of plans covering only individual owners (such as solo 401(k) plans), given the proposal to permit working owners to participate in ERISAcovered MEPs and ARPs. No commenter suggested the Proposed Rule was insufficient. One commenter, however, requested that the Department make it clear that plans without employees continue not to be covered by ERISA. In response to this comment, the Department confirms that the final rule permits working owners to participate in ERISA-covered MEPs without altering its position that a ‘‘plan under which . . . only a sole proprietor’’ participates ‘‘will not be covered under title I.’’ 29 CFR 2510.3–3(b). Thus, under the final rule, working owners without employees can join an ERISAcovered MEP or they can sponsor a defined contribution plans covering only themselves, which are (and historically have been) outside the coverage of title 1 of ERISA. h. Coordination With Other Federal Agencies Several commenters raised issues involving the Code and other federal laws beyond the Department’s jurisdiction, and requested that the Department coordinate and work with the relevant agencies to provide PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 guidance to facilitate and promote MEPs. For example, several commenters requested that the Department work and coordinate with the Department of the Treasury and the Internal Revenue Service (IRS) on guidance regarding the circumstances under which a MEP may satisfy the tax-qualification requirements in the Code, including the consequences if one or more employers that sponsored or adopted the plan fails to take one or more actions necessary to meet those requirements as directed by Executive Order 13847. On July 3, 2019, after consultation with the Department of Labor, the Department of the Treasury issued a notice of proposed rulemaking addressing these tax qualification issues in the Federal Register (84 FR 31777). Specifically, the proposed regulations would provide an exception, if certain requirements are met, to the application of the ‘‘unified plan rule’’ for a defined contribution MEP in the event of a failure by an employer participating in the plan to satisfy a qualification requirement or to provide information needed to determine compliance with a qualification requirement. These proposed regulations would affect MEPs, participants in MEPs (and their beneficiaries), employers participating in MEPs, and MEP plan administrators. The Department of Labor will continue to consult with the Department of the Treasury and the IRS in connection with their development of those regulations. Other commenters focused on the need for guidance or special rules on the Code’s non-discrimination provisions more generally. One commenter requested the Department to coordinate with the IRS to clarify that MEPs are permitted to establish arrangements under section 403(b) of the Code (programs for the purchase of an annuity contract or the establishment of a custodial account). One commenter requested that the Department coordinate and work with the IRS and the Securities and Exchange Commission to remove restrictions on the ability of 403(b) plans to invest in certain investment vehicles. These comments are beyond the scope of this final rule. i. Severability Finally, paragraph (e)(1) of the final rule includes a severability provision that provides that if any of the provisions in the final rule are found to be invalid or stayed pending further agency action, the remaining portions of the rule would remain operative and available for qualifying employer groups or associations or PEOs. Paragraph (e)(2) of the final rule illustrates how the Department intends the severability E:\FR\FM\31JYR3.SGM 31JYR3 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations provision to apply in one specific situation. The example illustrates that if a federal court were to find the substantial business purpose test to be legally insufficient, then the substantialbusiness-purpose safe harbor (viability) becomes the whole of that part of the rule without the need for any further notice-and-comment rulemaking by the Department. Although the example is detailed and specific, the severability provision itself is not limited to the facts of the example. For instance, a ruling by a federal court that the ‘‘working owners’’ provision in section 2510.3– 55(d) is void will not impact the ability of an employer group or association to meet the ‘‘commonality of interest’’ requirement in section 2510.3–55(b)(2) by being located in the same geographic locale. This example has been added to paragraph (e)(2) of the final rule to clarify the Department’s intention that the severability provision is one of general applicability and, consequently, applies to the whole of the section and is not limited to any specific provision. jbell on DSK3GLQ082PROD with RULES3 C. Regulatory Impact Analysis 1. Summary As discussed earlier in the preamble, this final rule is intended to facilitate the creation and maintenance of MEPs by clarifying the circumstances under which a person may act as an ‘‘employer’’ within the meaning of ERISA section 3(5) in sponsoring a MEP. Workplace retirement plans provide an effective way for employees to save for retirement. Unfortunately, however, many hardworking Americans, especially those employed by small businesses and those who are selfemployed, do not have access to a retirement plan at work. This has become a more significant issue as employees are living longer and facing the difficult prospect of outliving their retirement savings. Expanding access to private sector MEPs could encourage the formation of workplace retirement plans and broaden access to such plans among small employers and among individuals who are ‘‘working owners’’ without employees, referred to herein as the ‘‘self-employed’’. Many employer groups and associations have a thorough knowledge of the economic challenges their members face. Using this knowledge and the regulatory flexibility provided by this final rule, employer groups and associations can sponsor MEPs tailored to the retirement plan needs of their members at lower costs than currently available options. Thus, the final rule provides employers with an important option to increase access of workers, VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 particularly those employed at small businesses and the self-employed, to high-quality workplace retirement plans. Small employers should benefit from economies of scale by participating in MEPs, which could reduce their administrative costs and plan fees. Like other large retirement plans, large MEPs created by sponsors meeting the conditions set forth in this rule would enjoy scale discounts and might exercise bargaining power with financial services companies. Large MEPs could pass some of these savings through to participating small employers. In particular, investment funds with tiered pricing have decreasing expense ratios based on the aggregate amount of money invested by a single plan.48 As a single plan, MEPs should lower the expense ratio for investment management through the pooling of investments from member employers, because the fee thresholds would apply at the MEP level rather than at the member employer level.49 Many well-established, geographically based organizations, such as local chambers of commerce, are strong candidates to sponsor MEPs. Currently, these geographically based organizations are restricted from doing so as a sponsor of a single plan under title I of ERISA unless their MEP meets the requirements of the Department’s 2012 subregulatory guidance for determining whether groups or associations of employers, or PEOs were able to act as employers under section 3(5) of ERISA.50 Such previous guidance requires groups or associations to have a particularly close economic or representational nexus to employers and employees participating in the plan. Many groups or associations and PEOs have identified these criteria, along with the absence of a clear pathway for PEOs to sponsor MEPs, as major impediments to the expansion of MEPs that are treated as single plans. By providing greater flexibility governing the sponsorship of MEPs, the Department 48 According to Morningstar, nearly half of all investment funds have management fee breakpoints at which fees are automatically reduced upon reaching an investment threshold. See Michael Rawson and Ben Johnson, ‘‘2015 Fee Study: Investors Are Driving Expense Ratios Down,’’ Morningstar, 2015, available at https:// news.morningstar.com/pdfs/2015_fee_study.pdf. 49 MEPs create a pool of assets for investment that, at the investment management level, are no different from pools of assets from other employee benefit plans. Consistent with the Department’s view that the pool of assets is a single plan, the Department expects that breakpoints for expense ratios would be applied at the MEP level rather than at the member employer level. 50 EBSA Advisory Opinion 2012–04A (May 25, 2012). PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 37527 expects this rule to reduce costs and increase access to workplace retirement plans for many employees of small businesses and the self-employed. Other potential benefits of the expansion of MEPs include: (1) Increased economic efficiency as small firms can more easily compete with larger firms in recruiting and retaining workers, (2) increased acceptance of rollovers from other qualified plans, (3) enhanced portability for employees that leave employment with an employer to work for another employer participating in the same MEP, and (4) higher quality data (more accurate and complete) reported to the Department on the Form 5500. The Department is aware that MEPs could be the target of fraud or abuse. By their nature, MEPs have the potential to build up a substantial amount of assets quickly and the effect of any abusive schemes on future retirement distributions may be hidden or difficult to detect for a long period. The Department, however, is not aware of direct information indicating that the risk for fraud and abuse is greater for MEPs than for other defined contribution pension plans. Nor was such information received among the comments responding to the proposal. Furthermore, the Department has compliance assistance and enforcement systems in place to safeguard plan assets from fraud and abuse. The Department believes that participation in workplace retirement plans will increase because of this rule; however, there is some uncertainty regarding the extent of the increase. Participation levels in workplace retirement plans depend on both how many employers decide to offer plans and how many employees choose to participate in those plans. An employer’s decision to offer a retirement plan relies on many factors, only some of which this final rule affects. If more employers adopt MEPs, it is unclear how many of their employees will choose to enroll and by how much aggregate retirement savings will increase. Nevertheless, given the significant potential for MEPs to expand access to affordable retirement plans, the Department has concluded that this rule will deliver social benefits that justify their costs. The Department’s analysis is explained more fully below. As discussed earlier in the preamble, some commenters argued that to achieve an actual substantial increase in access to retirement plans, the Department must expand the rule to allow (1) ‘‘open MEPs’’ or ‘‘pooled employer plans,’’ which generally are arrangements that cover employees of employers with no E:\FR\FM\31JYR3.SGM 31JYR3 37528 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations relationship other than their joint participation in the MEP, and (2) socalled ‘‘corporate MEPs,’’ which are plans that cover employees of related employers that are not in the same controlled group or affiliated service group.51 Although the Department did not include such arrangements in the final rule, it is simultaneously publishing elsewhere in today’s Federal Register a related RFI regarding whether commercial service providers and corporate groups, other than employer groups or associations and PEOs, should be able to sponsor MEPs to develop a more robust record and obtain additional data regarding this issue. 2. Executive Orders Executive Orders 12866 52 and 13563 53 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects; distributive impacts; and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. Under Executive Order 12866, ‘‘significant’’ regulatory actions are subject to review by the Office of Management and Budget (OMB). Section 3(f) of the Executive Order defines a ‘‘significant regulatory action’’ as an action that is likely to result in a rule: (1) Having an annual effect on the economy of $100 million or more in any one year, or adversely and materially affecting a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local or tribal governments or communities (also referred to as ‘‘economically significant’’), (2) creating a serious inconsistency or otherwise interfering with an action taken or planned by another agency, (3) materially altering the budgetary impacts of entitlement grants, user fees, or loan programs or the rights and obligations of recipients thereof, or (4) raising novel legal or policy issues arising out of legal mandates, the President’s priorities, or the principles set forth in the Executive Order. It has been determined that this rule is economically significant within the meaning of section 3(f)(1) of the Executive Order. Therefore, OMB has reviewed the rule pursuant to the Executive Order. The background to the rule is discussed earlier in the preamble. This section assesses the expected economic effects of the rule. 3. Introduction and Need for Regulation While many Americans have accumulated significant retirement savings, many others have little, if any, assets saved for retirement. For example, the Employee Benefit Research Institute projects that 24 percent of the population aged 35 to 64 will experience a retirement savings shortfall, meaning resources in retirement will not be sufficient to meet their average retirement expenditures.54 If uncovered long-term care expenses from nursing homes and home health care are included in the retirement readiness calculation, 43 percent of that population will experience a shortfall, and the projected retirement savings deficit is $4.13 trillion.55 Among all workers aged 26 to 64 in 2013, 63 percent participated in a retirement plan either directly or through a working spouse. That percentage ranged, however, from 52 percent of those aged 26 to 34 to 68 percent of those aged 55 to 64; and from 25 percent for those with adjusted gross income (AGI) less than $20,000 per person to 85 percent for those with AGI of $100,000 per person or more.56 Workplace retirement plans often provide a more effective way for employees to save for retirement than saving in their own IRAs. Compared with saving on their own in IRAs, workplace retirement plans provide employees with: (1) Higher contribution limits, (2) generally lower investment management fees as the size of plan assets increases, (3) a well-established uniform regulatory structure with important consumer protections, including fiduciary obligations, recordkeeping and disclosure requirements, legal accountability provisions, and spousal protections, (4) automatic enrollment, and (5) stronger protections from creditors.57 At the same time, workplace retirement plans provide employers with choice among plan features and the flexibility to tailor retirement plans that meet their business and employment needs. In spite of these advantages, many workers, particularly those employed by small employers and the self-employed, lack access to workplace retirement plans. Table 1 below shows that at business establishments with fewer than 50 workers, 49 percent of the workers have access to retirement benefits.58 In contrast, at business establishments with more than 500 workers, 88 percent of workers have access to retirement benefits. Table 1 also shows that many small employers do not offer a retirement plan to their workers.59 TABLE 1—RETIREMENT PLAN COVERAGE BY EMPLOYER SIZE Workers Share with access to a retirement plan % Establishment size: number of workers jbell on DSK3GLQ082PROD with RULES3 1—49 ......................................................................................................................... 50—99 ....................................................................................................................... 100—499 ................................................................................................................... 500+ ........................................................................................................................... 51 In Advisory Opinion 89–06A, the Department stated that it would consider a member of a controlled group of corporations that establishes a benefit plan for its employees and/or the employees of other members of the controlled group to be an employer within the meaning of ERISA section 3(5). 52 58 FR 51735 (Oct. 4, 1993). 53 76 FR 3821 (Jan. 21, 2011). 54 Jack VanDerhei, ‘‘EBRI Retirement Security Projection Model®(RSPM)—Analyzing Policy and VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 Share participating in a retirement plan % 49 65 79 89 Design Proposals,’’ Employee Benefit Research Institute Issue Brief, no. 451 (May 31, 2018). 55 Id. 56 Peter J. Brady, ‘‘Who Participates in Retirement Plans,’’ ICI Research Perspective, vol. 23, no. 05, (July 2017). 57 Section 522 of the Bankruptcy Code (11 U.S.C. 522), provides an unlimited exemption for SEP and Simple IRAs, and pension, profit sharing, and qualified plans, such as 401(k)s, as well as plan Establishments 34 46 58 76 Share offering a retirement plan % 45 75 88 94 assets that are rolled over to an IRA. However, other traditional IRAs and Roth IRAs are protected up to a value of $1,283,025 per person for 2018 (inflation adjusted). 58 These statistics apply to private industry. U.S. Bureau of Labor Statistics, National Compensation Survey, Employee Benefits in the United States (March 2018). 59 Id. E:\FR\FM\31JYR3.SGM 31JYR3 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations 37529 TABLE 1—RETIREMENT PLAN COVERAGE BY EMPLOYER SIZE—Continued Workers Share with access to a retirement plan % Establishment size: number of workers All ............................................................................................................................... Establishments Share participating in a retirement plan % 66 50 Share offering a retirement plan % 48 Source: These statistics apply to private industry. U.S. Bureau of Labor Statistics, National Compensation Survey, Employee Benefits in the United States (March 2018). jbell on DSK3GLQ082PROD with RULES3 Surveys of employers have suggested several reasons employers—especially small businesses—do not offer a workplace retirement plan to their employees. Regulatory burdens and complexity add costs and can be significant disincentives. A survey by the Pew Charitable Trusts found that only 53 percent of small- to mid-sized businesses offer a retirement plan, and 37 percent of those not offering a plan cited cost as the main reason.60 Employers often also cite annual reporting costs and exposure to potential fiduciary liability as major impediments to plan sponsorship.61 Some employers may not offer retirement benefits because they do not perceive such benefits as necessary to recruit and retain good employees.62 In focus groups, many employers not offering retirement benefits reported believing that their employees would prefer to receive higher salaries, more paid time off, or health insurance benefits than retirement benefits.63 Small employers themselves may not have much incentive to offer retirement benefits because they are not sure how long their businesses are going to survive. This may lead them to focus on short-term concerns rather than their employees’ long-term well-being. In analyzing new establishments, researchers found that 56 percent did not survive for four years.64 60 The Pew Charitable Trusts, ‘‘Employer Barriers to and Motivations for Offering Retirement Benefits,’’ Issue Brief (June 21, 2017), available at http://www.pewtrusts.org/en/research-andanalysis/issue-briefs/2017/06/employer-barriers-toand-motivations-for-offering-retirement-benefits#0overview. 61 See U.S. Government Accountability Office, GAO–12–326: ‘‘Private Pensions: Better Agency Coordination Could Help Small Employers Address Challenges to Plan Sponsorship’’ (March 2012) at 18–19. (https://www.gao.gov/products/GAO-12326). 62 Employee Benefit Research Institute, ‘‘Low Worker Take Up of Workplace Benefits May Impact Financial Wellbeing’’ (April 10, 2018). 63 The Pew Charitable Trusts, ‘‘Employer Barriers to and Motivations for Offering Retirement Benefits,’’ 2017. 64 Amy E. Knaup and Merissa C. Piazza, ‘‘Business Employment Dynamics data: survival VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 Many small businesses may have not taken advantage of the existing opportunities to establish workplace retirement savings plans because they lack awareness. As found in a Pew survey, two-thirds of small- and midsized employers that were not offering a retirement plan said they were not at all familiar with currently available options such as Simplified Employee Pension (SEP) and Savings Incentive Match Plan for Employees (SIMPLE) plans.65 MEPs may address several of these issues. Specifically, to the extent that MEPs reduce the total cost of providing various types of plans to small employers, market forces may lead MEPs to offer and promote such plans to small employers that would otherwise have been overlooked because of high costs. Moreover, groups or associations and PEOs sponsoring MEPs sometimes may have more success raising awareness among small employers of the retirement savings plan options that exist and the benefits of establishing such plans as a tool for recruiting or retaining qualified workers. MEP sponsors may be particularly effective at raising awareness among small employers that are already members of the group or association or clients of the PEO. Small businesses typically have fewer administrative efficiencies and less bargaining power than large employers do. The final rule provides a way for small employers and the self-employed to band together in MEPs that, as single, large plans, have some of the same economic advantages as other large plans. As discussed above, the Department’s prior subregulatory guidance limits the ability of small employers and self-employed individuals to join MEPs and thereby to realize attendant potential administrative cost savings. With certain exceptions, each employer and longevity, II,’’ Monthly Labor Review (Sept. 2007). 65 The Pew Charitable Trusts, ‘‘Employer Barriers to and Motivations for Offering Retirement Benefits,’’ 2017. PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 operating a separate plan must file its own Form 5500 annual report; and generally, if the plan has 100 or more participants, an accountant’s audit of the plan’s financial position instead of relying on the audit of a combined plan.66 Each small employer also would have to obtain a separate fidelity bond satisfying the requirements of ERISA.67 As stated earlier in the preamble, on August 31, 2018, President Trump issued Executive Order 13847, ‘‘Strengthening Retirement Security in America,’’ stating that ‘‘[i]t shall be the policy of the Federal Government to promote programs that enhance retirement security and expand access to workplace retirement savings plans for American workers.’’ The Executive Order 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 participate in a MEP as a workplace retirement savings option offered to their employees, subject to appropriate safeguards, and (2) increase retirement security for part-time workers, sole proprietors, working owners, and other entrepreneurial workers with 66 Note that ERISA regulations exempt small plans, generally those with under 100 participants, from the audit requirement if they meet certain conditions. 29 CFR 2520.104–46. In 2015, more than 99 percent of small defined contribution pension plans that filed the Form 5500 or the Form 5500–SF did not attach an audit report. 67 ERISA section 412 and related regulations (29 CFR 2550.412–1 and 29 CFR part 2580) generally require every fiduciary of an employee benefit plan and every person who handles funds or other property of such plan to be bonded. ERISA’s bonding requirements are intended to protect employee benefit plans from risk of loss due to fraud or dishonesty on the part of persons who handle plan funds or other property. ERISA refers to persons who handle funds or other property of an employee benefit plan as plan officials. A plan official must be bonded for at least 10 percent of the amount of funds he or she handles, subject to a minimum bond amount of $1,000 per plan with respect to which the plan official has handling functions. In most instances, the maximum bond amount that can be required under ERISA with respect to any one plan official is $500,000 per plan; however, the maximum required bond amount is $1,000,000 for plan officials of plans that hold employer securities. E:\FR\FM\31JYR3.SGM 31JYR3 37530 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations nontraditional employer–employee relationships by expanding their access to workplace retirement savings plans, including MEPs. The Executive Order further directed, to the extent permitted by law and supported by sound policy, the Department to consider within 180 days of the date of the Executive Order whether to issue a notice of proposed rulemaking, other guidance, or both, that would clarify when a group or association of employers, or other appropriate business or organization could be an ‘‘employer’’ within the meaning of ERISA section 3(5). In response to the Executive Order, the Department has conducted a thorough review of its current policies regarding MEPs and of comments received in response to the proposal, and has determined that its existing interpretive position is unnecessarily narrow. The Department has concluded that regulatory action is appropriate to establish greater flexibility in the regulatory standards governing the criteria that must exist in order for an employer group or association or PEO to sponsor a MEP. The final rule generally provides this flexibility by making five important changes to the Department’s prior subregulatory guidance. First, it clarifies the existing requirement in prior subregulatory guidance that bona fide groups or associations must have at least one substantial business purpose unrelated to the provision of benefits. Second, it relaxes the requirement that group or association members share a common interest, as long as they operate in a common geographic area. Third, it makes clear that groups or associations whose members operate in the same trade, industry, line of business, or profession could sponsor MEPs, regardless of geographic distribution. Fourth, it clarifies that working owners without employees are eligible to participate in MEPs sponsored by bona fide employer groups or associations that meet the requirements of the rule. Fifth, it establishes criteria under which ‘‘bona fide’’ PEOs may sponsor MEPs covering the employees of their client employers. These criteria also result in more MEPs being treated consistently under the Code and title I of ERISA, and such consistency removes another barrier inhibiting the broader establishment of MEPs. As discussed earlier in the preamble, a retirement plan covering employees of multiple employers that satisfies the requirements of IRC section 413(c) is considered a single plan under IRC section 413(c), which addresses the tax-qualified status of MEPs. Moreover, in Revenue Procedure 2002–21, 2002–1 C.B. 911, the IRS issued guidance that provided an avenue for PEOs to administer a MEP for the benefit of worksite employees of client organizations and not violate the exclusive benefit rule.68 By establishing greater flexibility in the standards and criteria for sponsoring MEPs than previously articulated in subregulatory interpretive rulings under ERISA section 3(5), the final regulation facilitates the adoption and administration of MEPs and should expand access to, and lower the cost of, workplace retirement savings plans, especially for employees of small employers and certain self-employed individuals. At the same time, reflecting the position taken in its subregulatory guidance, the Department intends that the conditions included in the final rule will continue to distinguish plans sponsored by entities that satisfy ERISA’s definition of ‘‘employer’’ from arrangements or services offered by other entities. 4. Affected Entities The final rule has the potential to encourage both the creation of new MEPs and the expansion of existing MEPs. As background for estimating the number of entities that would be affected by this rule and its impact, the Department has reviewed the characteristics of existing MEPs that file Forms 5500.69 Since this rule is limited to defined contribution pension plans, referred to in this document as ‘‘MEPs’’ or ‘‘DC MEPs,’’ Table 2 presents statistics for DC MEPs only. Currently DC MEPs comprise only a small share of the private sector retirement system, as shown in Table 2.70 Based on the latest available data, about 4,630 DC MEPs exist with approximately 4.4 million total participants, 3.7 million of whom are active participants. DC MEPs hold about $181 billion in assets.71 TABLE 2—CURRENT STATISTICS ON MEPS Number of MEPs MEP DC Plans ....................................................................... As a share of all ERISA DC plans ................................. MEP DC Plans ....................................................................... 401(k) Plans .................................................................... Other DC Plans ............................................................... 4,630 0.7% 4,630 4,391 239 Total participants Active participants 4.4 million ............. 4.4% ..................... 4.4 million ............. 4.1 million ............. 0.4 million ............. 3.7 million ............. 4.6% ..................... 3.7 million ............. 3.4 million ............. 0.3 million ............. Total assets $181 billion. 3.2%. $181 billion. $166 billion. $15 billion. jbell on DSK3GLQ082PROD with RULES3 Source: EBSA performed these calculations using the 2016 Research File of Form 5500 filings. For these purposes, EBSA classified a plan as a MEP if it indicated ‘‘multiple employer plan’’ status on the Form 5500 Part I Line A and if it did not report collective bargaining. The estimates are weighted and rounded, which means they may not sum precisely. Some DC MEPs are very large; 56 percent of total participants are in MEPs with 10,000 or more participants.72 Furthermore, 98 percent of total participants are in MEPs with 100 or more participants. There are 40 MEPs holding over $1 billion in assets each.73 In existing DC MEPs, 89 percent of participants direct all of the 68 See Internal Revenue Code (IRC) section 413(c)(2) and 26 CFR 1.413–2(c) of the Income Tax Regulations, which provide that, in determining whether a MEP is for the exclusive benefit of its employees (and their beneficiaries), all employees participating in the plan are treated as employees of each such employer. IRC sections 413(c)(1) and (3) provide that IRC sections 410(a) (participation) and 411 (minimum vesting standards) also are applied as if all employees of each of the employers who maintain the plan were employed by a single employer. Under Treas. Reg. 26 CFR 1.413–2(a)(2), a plan is subject to the requirements of IRC section 413(c) if it is a single plan and the plan is maintained by more than one employer. See generally Treas. Reg. 26 CFR 1.413–1(a)(2), 1.413– 2(a)(2), and 1.414(l)–1(b)(1). However, the minimum coverage requirements of IRC section 410(b) and related nondiscrimination requirements are generally applied to a MEP on an employer-byemployer basis. 69 ‘‘Forms 5500’’ refers collectively to the Form 5500 (Annual Return/Report of Employee Benefit Plan) and the Form 5500–SF (Annual Return/Report of Small Employee Benefit Plan). 70 EBSA performed these calculations using the 2016 Research File of Form 5500 filings. For these purposes, EBSA classified a plan as a MEP if it indicated ‘‘multiple employer plan’’ status on the Form 5500 Part I Line A and if it did not report collective bargaining. The estimates are weighted and rounded, which means they may not sum precisely. 71 Id. 72 Id. 73 Id. VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 E:\FR\FM\31JYR3.SGM 31JYR3 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations investments, another 8 percent direct the investment of a portion of the assets, and the remainder did not direct the investment of any of the assets.74 There are caveats to keep in mind when interpreting the data presented in Table 2 above. For example, under the Department’s prior subregulatory guidance, some plans established and maintained by groups of employers that might meet the conditions of the final rule, would have been deemed to be individual plans sponsored by each of the employers in the group. In these circumstances, each participating employer is required to file a Form 5500 just as it would if it established its own plan. These filings are indistinguishable from typical single-employer plans and do not appear in the data set as identifiable multiple employer plans.75 As stated earlier in the preamble, PEOs generally are entities that enter into agreements with client employers to perform certain employment responsibilities, such as tax withholding, to the individuals who perform services for the client employers. At the end of 2017, there were 907 PEOs operating in the United States, providing services to 175,000 client employers with 3.7 million employees.76 The final rule would allow certain PEOs meeting the requirements of paragraph (c) to sponsor MEPs and offer coverage to their client employers’ employees. This final rule should benefit many workers that might otherwise tend to lack access to high-quality, affordable, on-the-job retirement savings opportunities. These workers include self-employed individuals without paid employees. Although there are other retirement savings vehicles available to these self-employed workers, they are less likely to access and participate in retirement plans. For example, only six percent of self-employed individuals participated in retirement plans in 2013.77 The final rule is expected to jbell on DSK3GLQ082PROD with RULES3 74 Id. 75 In addition, there are some plans that are erroneously indicating that they are ‘‘multiple employer plans’’ rather than ‘‘single-employer plans’’ under title I of ERISA. These plans may in fact be group or association or PEO-type MEPs that do not meet the conditions of the prior DOL subregulatory guidance. This distorts the database and leads to inaccurate estimates. In particular, the high number of plans erroneously reporting that they are MEPs likely overestimates the number of existing MEPs for purposes of title I of ERISA and underestimates the average size of MEPs. 76 Laurie Bassi and Dan McMurrer, ‘‘An Economic Analysis: The PEO Industry Footprint in 2018,’’ National Association of Professional Employer Organizations, September 2018, available at https:// www.napeo.org/docs/default-source/white-papers/ 2018-white-paper-final.pdf?sfvrsn=6. 77 Craig Copeland, ‘‘Employment-Based Retirement Plan Participation: Geographic VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 provide many of these self-employed workers without employees with a new opportunity to access a retirement plan by joining a MEP. Approximately 8 million self-employed workers between ages 21 and 70, representing 6 percent of all similarly aged workers, have no employees and usually work at least 20 hours per week, and under this rule will become eligible to join MEPs.78 These workers are involved in a wide range of occupations: lawyers, doctors, real estate agents, childcare providers, as well as workers who provide ondemand services, often through online intermediaries, such as ride-sharing online platforms. In many respects, the self-employed are quite different from employees in a traditional employer– employee arrangement. For example, self-employed persons often have complex work arrangements—they are more likely to work part-time or hold multiple jobs.79 Similarly, some provide on-demand services part-time, or as a second or third job.80 On-demand workers, in particular, may face obstacles to saving for retirement. While a number of taxpreferred retirement savings vehicles are already available to them, many might find it difficult and expensive to navigate these options on their own.81 Relatively few of those workers have access to employer-sponsored retirement plans, one survey found.82 According to another survey, many traditional workers who pursue ondemand work on the side do so at least Differences and Trends, 2013,’’ EBRI Issue Brief, no. 405, October 2014. In this report, the self-employed are mostly unincorporated. 78 DOL tabulations of the February 2019 Current Population Survey basic monthly data. 79 For tax administrative data, see Emilie Jackson, Adam Looney, and Shanthi Ramnath, ‘‘The Rise of Alternative Work Arrangements: Evidence and Implications for Tax Filing and Benefit Coverage.’’ U.S. Department of Treasury, Office of Tax Analysis, Working Paper 114 (January 2017). For survey data, see the Survey of Business Owners and Self-Employed Persons, 2012 from the Census Bureau at https://factfinder.census.gov/faces/ tableservices/jsf/pages/ productview.xhtml?pid=SBO_2012_ 00CSCBO04&prodType=table. 80 ‘‘Gig Economy and the Future of Retirement,’’ Betterment, 2018, available at https:// www.betterment.com/wp-content/uploads/2018/05/ The-Gig-Economy-Freelancing-and-RetirementBetterment-Survey-2018_edited.pdf. 81 For related information see, for example, Jonathan Kahler, ‘‘Retirement planning in a ‘gig economy’,’’ Vanguard, June 13, 2018, available at https://vanguardblog.com/2018/06/13/retirementplanning-in-a-gig-economy/, which explains that working on demand is ‘‘running your own HR department and you’re the benefits manager, which means taking sole responsibility for your retirement.’’ 82 ‘‘Gig Workers in America: Profiles, Mindsets, and Financial Wellness,’’ Prudential, 2017, available at http://research.prudential.com/ documents/rp/Gig_Economy_Whitepaper.pdf. PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 37531 partly to help them save more for retirement. On the other hand, most of those for whom on-demand work is their main job have less than $1,000 set aside for retirement.83 MEPs should help raise awareness and ease entry to retirement coverage for broad classes of these workers, such as on-demand drivers. Electronically mediated workers obtain short jobs or tasks through websites or mobile apps that both connect them with customers and facilitate payment for the tasks. In May 2017, there were approximately 1.6 million electronically mediated workers (1 percent of total employment) including all who performed electronically mediated work for their main job, a second job, or for additional work for pay.84 Compared to the overall workforce, electronically mediated workers are more likely to work parttime, more likely to have a bachelor’s degree or higher, and more likely to be self-employed, particularly unincorporated self-employed.85 Independent contractors were more likely to perform electronically mediated work (6 percent) than workers in traditional employer–employee arrangements (less than 1 percent) in 2017. Policymakers have expressed concern about how many workers providing ondemand services, and self-employed workers more generally, do not have access to retirement plans and appear to be ill-prepared for retirement. By allowing self-employed individuals who meet the requirements of the final rule to participate in MEPs, the rule will increase their access to retirement plans. 5. Benefits a. Expanded Access to Coverage Generally, employees rarely choose to save for retirement outside of the workplace, despite having options to save in tax-favored savings vehicles, such as investing either in traditional IRAs or Roth IRAs. Thus, the availability of workplace retirement plans is a significant factor affecting whether workers save for their retirement. Yet, despite the advantages of workplace retirement plans, access to 83 ‘‘Gig Economy and the Future of Retirement,’’ Betterment, 2018, available at https:// www.betterment.com/wp-content/uploads/2018/05/ The-Gig-Economy-Freelancing-and-RetirementBetterment-Survey-2018_edited.pdf. This same survey found, however, that most on-demand workers are paying off debt. 84 ‘‘Electronically mediated work: New questions in the Contingent Worker Supplement’’ Monthly Labor Review, September 2018, Bureau of Labor Statistics. 85 Id. E:\FR\FM\31JYR3.SGM 31JYR3 jbell on DSK3GLQ082PROD with RULES3 37532 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations such plans for employees of small businesses is relatively low. The final rule’s expansion of access to certain MEPs enables groups of private-sector employers to participate in a collective retirement plan and provide employers with another efficient way to reduce some costs of offering workplace retirement plans. Thereby, more plan formation and broader availability of such plans should occur, especially among small employers. The MEP structure addresses significant concerns from employers about the costs of setting up and administering retirement benefit plans. In order to participate in a MEP, employers generally are required to execute a participation agreement or similar instrument setting forth the rights and obligations of the MEP and participating employers. These employers will then participate in a single plan, rather than sponsoring a separate ERISA-covered plan. Therefore the employer group or association or PEO will act as the ‘‘employer’’ sponsoring the MEP within the meaning of section 3(5) of ERISA. That employer group or association or PEO typically will assume the roles of plan administrator and named fiduciary. The individual employers would not be directly responsible for the MEP’s overall compliance with ERISA’s reporting and disclosure obligations. Accordingly, the MEP structure should address small employers’ concerns regarding the cost associated with fiduciary liability of sponsoring a retirement plan by effectively transferring much of the legal risks and responsibilities to professional fiduciaries who would be responsible for managing plan assets and selecting investment menu options, among other things. Moreover, there is potential that more of the fiduciary responsibility will reside where it will be discharged more efficiently by qualified professionals with more skill than otherwise would be expected, which could ultimately lead to greater protection for plan participants and beneficiaries. MEPs as large plans will generally be likely to work with service providers with a high level of specialized expertise. Participating employers’ continuing involvement in the day-to-day operations and administration of their MEP generally could be limited to enrolling employees and forwarding voluntary employee and employer contributions to the plan. Thus, participating employers could keep more of their day-to-day focus on managing their businesses, rather than their pension plans. VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 Congress has repeatedly enacted legislation intended to lower costs, simplify requirements, and ease administrative burdens for small employers to sponsor retirement plans. For example, the Revenue Act of 1978 86 and the Small Business Job Protection Act of 1996 87 established the SEP IRA plan and the SIMPLE IRA plan, respectively, featuring fewer compliance requirements than other plan types. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) 88 included provisions intended to increase access to retirement plans for small businesses by: (1) Eliminating topheavy testing requirements for safe harbor 401(k) plans, (2) increasing contribution limits for employersponsored IRA plans and 401(k) plans, and (3) creating tax credits for small employers to offset new plan startup costs and for individuals within certain income limits who make eligible contributions to retirement plans. Despite these legislative efforts to increase access to retirement savings plans for small employers, as shown in Table 1, above, the percentage of the U.S. workforce participating in a workplace retirement plan remains around 50 percent. Therefore, a critical question is whether MEPs meeting the requirements of the final rule will increase access to workplace retirement plans when other initiatives have had limited effect. Several factors indicate to the Department that they should. First, the Department believes that employers may be more likely to participate in a MEP sponsored by a PEO, or a group or association of employers, with whom they have a preexisting relationship based on trust and familiarity. For example, a PEO that performs payroll or human resources services for an employer would have connected information technology infrastructures that would facilitate efficient transfers of employee and employer contributions. Similarly, small employers obtaining health insurance coverage through an AHP sponsored by a group or association may find it convenient and cost effective to establish retirement plans offered by the same group or association. In many cases, the group or association and small employers may link their information technology systems to collect healthcare premiums from participating employers,89 and that 86 Public 87 Public Law 95–600, 152, 92 Stat. 2763, 2791. Law 104–188, 1421, 110 Stat. 1755, 1792. 88 Public Law 107–16, 115 Stat. 38. 89 In the analogous context of health plans, the Department recently issued a final regulation that PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 infrastructure could also be used to collect retirement contributions, resulting in IT-related start-up costs savings. In addition, small employers and self-employed individuals may encounter fewer administrative burdens if the same group or association administers both their health and retirement plans. Second, employers may be incentivized to sponsor these plans based on cost savings that may occur when payroll services are integrated with retirement plan record-keeping systems. Several firms in the market already provide payroll services and plan record-keeping services particularly tailored to small employers.90 These firms can afford to provide these integrated services at a competitive price, suggesting that integrating these services could lead to some efficiency gains. Since PEOs already provide payroll services to client employers, a MEP sponsored by a PEO can reap the benefits of integrating these services, which can in turn benefit participating employers through lower fees and ease of administration. As further discussed in the uncertainty section below, the Department does not have sufficient data to determine precisely the likely extent of participation by small employers and the self-employed in MEPs due to the final rule. Nor did the comments submitted in response to the proposed rule offer data on this topic. However, overall, the Department believes that the rule will provide a new valuable option for small employers and the self-employed to adopt retirement savings plans for their employees, which should increase access to retirement plans for many American workers. b. Reduced Fees and Administration Savings Many MEPs would benefit from scale advantages that small businesses do not currently enjoy, and the Department expects that MEPs will pass some of the attendant savings onto participating enhances the ability of unrelated employers to band together to provide health benefits through a single ERISA-covered plan called an AHP. The AHP Rule, which was issued on June 21, 2018, expands access to more affordable, quality health care by amending the definition of ‘‘employer’’ under section 3(5) of ERISA for AHPs. Similar to this rule, the AHP Rule established alternative criteria under ERISA’s section 3(5) definition of employer to permit more groups or associations of employers to establish a multiple employer group health plan that is a single employee welfare benefit plan within the meaning of ERISA section 3(1) of ERISA. 90 Cerulli Associates, U.S. Retirement Markets 2016 (available at https://www.cerulli.com/vapi/ public/getcerullifile?filecid=Cerulli-US-RetirementMarkets-2016-Information-Packet). E:\FR\FM\31JYR3.SGM 31JYR3 jbell on DSK3GLQ082PROD with RULES3 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations employers and participants.91 Grouping small employers together into a MEP could facilitate savings through administrative efficiencies (economies of scale) and sometimes through price negotiation (market power). The degree of potential savings may be different for different types of administrative functions. For example, scale efficiencies can be very large with respect to asset management, and may be smaller, but still meaningful, with respect to recordkeeping. Large scale may create two distinct economic advantages for MEPs. First, as scale increases, marginal costs for MEPs would diminish and MEPs would spread fixed costs over a larger pool of member employers and employee participants, creating direct economic efficiencies. Second, larger scale may increase the negotiating power of MEPs. Negotiating power matters when competition among financial services providers is less than perfect and they can command greater profits than in an environment with perfect competition. Very large plans may sometimes exercise their own market power to negotiate lower prices, translating what would have been higher revenue for financial services providers into savings for member employers and employee participants. There may be times when scale efficiencies would not translate into savings for small employer members and their employee participants because regulatory requirements applicable to large MEPs may be more stringent than those applicable to most separate small plans. For example, some small plans are exempt from annual reporting requirements, and many others are subject to more streamlined reporting requirements than larger plans. More often, however, the legal status of MEPs as a single large plan will streamline certain regulatory burdens. For example, a MEP can file a single annual return/ report and obtain a single bond in lieu of the multiple reports and bonds necessary when other providers of bundled financial services administer many separate plans. As a result of these two types of scale efficiencies, MEPs operating as a large single plan likely will secure substantially lower prices from financial services companies than such firms would charge separate small employer plans. Asset managers commonly offer proportionately lower prices, relative to assets invested, to larger investors, under so-called tiered pricing practices. 91 See, e.g., BlackRock, ‘‘Expanding Access to Retirement Savings for Small Business,’’ Viewpoint (Nov. 2015). VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 For example, investment companies often offer lower-priced mutual fund share classes to customers whose investments in a fund surpass specified break points.92 These lower prices may reflect scale economies in any or all aspects of administering larger accounts, such as marketing, distribution, asset management, recordkeeping, and transaction processing. Large MEPs likely will qualify for lower pricing compared with separate plans of small employers. MEP participants that benefit from lower asset-based fees would enjoy superior investment returns net of fees. The availability and magnitude of scale efficiencies may be different with respect to different retirement plan services. For example, asset management generally enjoys very substantial large-scale efficiencies. Investors of all kinds generally benefit by investing in large comingled pools. Even within large pools, however, small investors often pay higher prices than larger ones. Mutual funds often charge lower ‘‘asset management’’ fees for larger investors, in both retail and institutional markets. The Department invited but did not receive comments in response to the proposal regarding the degree to which large MEPs would provide small employers with scale advantages in asset management larger than those provided by other large pooled asset management vehicles, such as mutual funds, available to separate small plans. As with asset management, scale efficiencies often are available with respect to other plan services. For example, the marginal costs for services such as marketing and distribution, account administration, and transaction processing often decrease as customer size increases. MEPs, as large customers, may enjoy scale efficiencies in the acquisition of such services. It is also possible, however, that the cost to MEPs of servicing their small employer92 Sarah Holden, James Duvall, and Elena Barone Chism, ‘‘The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2017,’’ ICI Research Perspective 24: no. 4 (June 2018) (concluding that 401(k) mutual fund investors pay lower expense ratios for a number or reasons, including ‘‘market discipline’’ imposed by performance- and costconscious plan sponsors). See also Russel Kinnel, ‘‘Mutual Fund Expense Ratio Trends,’’ Morningstar, (June 2014), at https://corporate.morningstar.com/ us/documents/researchpapers/fee_trend.pdf (accessed Aug. 21, 2018) (stating that breakpoints are built into mutual fund management fees so that a fund charges less for each additional dollar managed); Vanguard, ‘‘What You Should Know About Mutual Fund Share Classes and Breakpoints,’’ at http://www.vanguard.com/pdf/ v415.pdf (stating that investors in certain class shares may be eligible for volume discounts if their purchases meet certain investment levels, or breakpoints). PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 37533 members may diminish or even offset such efficiencies. Stated differently, MEPs scale efficiencies may not always exceed the scale efficiencies from other providers of bundled financial services used by small employers that sponsor separate plans. For example, small pension plans sometimes incur high distribution costs, reflecting commissions paid to agents and brokers who sell investment products to plans. MEPs, unlike large single-employer plans, must themselves incur some cost to distribute retirement plans to large numbers of small businesses. But relative to traditional agents and brokers, MEPs should reduce costs if they are able to take economic advantage of members’ existing ties to a sponsoring group or association of employers or PEO. This can be a more efficient business model than sending out brokers and investment advisers to reach out to small businesses one-byone, which could result in lower administrative fees for plan sponsors and participants. For much the same reason, MEPs sponsored by groups or associations of employers that perform other functions for their members in addition to offering retirement benefits (such as chambers of commerce or trade associations) and PEOs have the potential to realize administrative savings. These existing organizations may already have extensive memberships and relationships with small employers; thus, they may have low marginal costs for recruitment, setup, marketing, and administration. These organizations may have been limited in their ability to offer MEPs to some or all of their existing members and clients (for example, to working owners, workers outside of a common industry, or employers contracting with PEOs) by the Department’s prior subregulatory guidance. Under the requirements of this final rule, however, they can newly provide such members and clients with access to MEPs. All of this suggests that many MEPs will enjoy scale efficiencies greater than the scale efficiencies available from other providers of bundled financial services. The scale efficiencies of MEPs, however, will still likely be smaller than the scale efficiencies enjoyed by very large single-employer plans. The Department invited but did not receive comments in response to the proposal on the nature, magnitude, and determinants of MEPs’ potential scale advantages, and on the conditions under which MEPs will pass more or less of the attendant savings to different participating employers. E:\FR\FM\31JYR3.SGM 31JYR3 37534 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations By enabling MEPs to comprise otherwise unrelated small employers and self-employed individuals (1) who are in the same trade, industry, line of business, or profession, or (2) have a principal place of business with a region that does not exceed the boundaries of the same State or metropolitan area (even if the area includes more than one State), this rule will allow more MEPs to be established and to claim a significant market presence and thereby pursue scale advantages. Consequently, this rule should extend scale advantages to some MEPs that otherwise might have been too small to achieve them and to small employers and working owners that absent the rule would have offered separate plans (or no plans) but that under this final rule may join large MEPs. While MEPs’ scale advantages may be smaller than the scale advantages enjoyed by very large single-employer plans, it nonetheless is illuminating to consider the deep savings historically enjoyed by the latter. Table 3 shows how much investment fees vary based on the amount of assets in a 401(k) plan.93 The table focuses on mutual funds, which are the most common investment vehicle in 401(k) plans, and shows that the average expense ratio for several dominant types of mutual funds is much lower for large plans than for smaller plans. And these data show the fees actually paid, rather than the lowest fees available to a plan. It is unclear what features and quality aspects accompanied the fees. TABLE 3—AVERAGE EXPENSE RATIOS OF MUTUAL FUNDS IN 401(k) PLANS IN BASIS POINTS, 2015 Domestic equity mutual funds Plan assets $1M–$10M ............................................... $10M–$50M ............................................. $50M–$100M ........................................... $100M–$250M ......................................... $250M–$500M ......................................... $500M–$1B .............................................. More than $1B ......................................... International equity mutual funds 81 68 55 52 49 45 36 Domestic bond mutual funds 101 85 72 68 63 60 52 International bond mutual funds 72 59 44 40 36 33 26 Target date mutual funds 85 77 66 64 67 65 65 79 68 54 55 50 50 48 Balanced mutual funds (non-target date) 80 64 50 45 42 39 32 Source: Average expense ratios are expressed in basis points and asset-weighted. The sample includes plans with audited 401(k) filings in the BrightScope database for 2015 and comprises 15,110 plans with $1.4 trillion in mutual fund assets. Plans were included if they had at least $1 million in assets and between 4 and 100 investment options. BrightScope/ICI, ‘‘The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans, 2015’’ (March 2018). There are some important caveats to interpreting Table 3. The first is that it does not include data for most of the smallest plans because, generally, plans with fewer than 100 participants generally are not required to submit audited financial statements because they file a Form 5500–SF. The second is that there is variation across plans in whether and to what extent recordkeeping costs are included in the mutual fund expense ratios paid by participants. In plans where recordkeeping is not entirely included in the expense ratios, it may be paid by employers, as a per-participant fee, or as some combination of these. These caveats mean that the link between fees and size could be either stronger or weaker than Table 3 suggests, creating some uncertainty about how large an advantage MEPs will offer. An alternative method of comparing potential size advantages is a broader measure called ‘‘total plan cost’’ calculated by BrightScope.94 Total plan cost likely provides a better way to compare costs because, in addition to costs paid in the form of expense ratios, it includes fees reported on the audited Form 5500. It comprises all costs regardless of whether they are paid by the plan, the employer, or the participants. Total plan cost includes recordkeeping services for all plans, for example, which is one reason that it is a more comparable measure than the data presented above in Table 3. When plans invest in mutual funds and similar products, BrightScope uses expense data from Lipper, a financial services firm. When plans invest in collective investment trusts and pooled separate accounts, BrightScope generates an estimate of the investment fees. Using total plan cost yields generally very similar results about the cost differences facing small and large plans. Table 4 shows that very few of the smaller plans are enjoying the low fees that are commonplace among larger plans.95 TABLE 4—LARGER PLANS TEND TO HAVE LOWER FEES OVERALL Total plan cost (in basis points) Plan assets jbell on DSK3GLQ082PROD with RULES3 10th percentile $1M–$10M ................................................................................................................. $10M–$50M ............................................................................................................... $50M–$100M ............................................................................................................. $100M–$250M ........................................................................................................... $250M–$500M ........................................................................................................... 93 Average expense ratios are expressed in basis points and asset-weighted. The sample includes plans with audited 401(k) filings in the BrightScope database for 2015 and comprises 15,110 plans with $1.4 trillion in mutual fund assets. Plans were included if they had at least $1 million in assets and VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 75 61 37 22 21 between 4 and 100 investment options. BrightScope/ICI, ‘‘The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans, 2015’’ (March 2018). 94 Id. PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 Median 90th percentile 111 91 65 54 48 162 129 93 74 66 95 Id. Data is plan-weighted. The sample is plans with audited 401(k) filings in the BrightScope database for 2015, which comprises 18,853 plans with $3.2 trillion in assets. Plans were included if they had at least $1 million in assets and between 4 and 100 investment options. E:\FR\FM\31JYR3.SGM 31JYR3 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations 37535 TABLE 4—LARGER PLANS TEND TO HAVE LOWER FEES OVERALL—Continued Total plan cost (in basis points) Plan assets 10th percentile $500M–$1B ................................................................................................................ More than $1B ........................................................................................................... Median 21 14 90th percentile 43 27 59 51 Source: Data is plan-weighted. The sample is plans with audited 401(k) filings in the BrightScope database for 2015, which comprises 18,853 plans with $3.2 trillion in assets. Plans were included if they had at least $1 million in assets and between 4 and 100 investment options. BrightScope/ICI, ‘‘The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans, 2015’’ (March 2018). jbell on DSK3GLQ082PROD with RULES3 Deloitte Consulting LLP conducted a survey of 361 defined contribution plans for the Investment Company Institute. The study calculates an ‘‘allin’’ fee that is comparable across plans including both administrative and investment fees paid by the plan and the participant. Generally, small plans with 10 participants are paying approximately 50 basis points more than plans with 1,000 participants.96 Small plans with 10 participants are paying about 90 basis points more than large plans with 50,000 participants. Deloitte predicted these estimates by analyzing the survey results using a regression approach calculating basis points as a share of assets. These research findings have shown that small plans and their participants generally pay higher fees than large plans and their participants. Because this rule will give many small employers the opportunity to join a MEP, some of which are very large plans, many of these employers will likely incur lower fees. Many employers that are not currently offering any retirement plan may join a MEP, leading their employees to save for retirement. Many employers already sponsoring a retirement plan might decide to join a MEP instead, seeking lower fees and reduced fiduciary liability exposure. If there indeed are lower fees in the MEPs than in their previous plans, those lower fees could translate into higher savings. c. Reporting and Audit Cost Savings The potential for MEPs to enjoy reporting cost savings merits separate attention because it is shaped not only by economic forces but also by the reporting requirements applicable to different plans. On the one hand, a MEP that is a large, single plan can file a single report and conduct a single audit, while separate plans may be required to file separate reports and conduct separate audits. On the other hand, a MEP that is a large plan is generally 96 Deloitte Consulting and Investment Company Institute, ‘‘Inside the Structure of Defined Contribution/401(k) Plan Fees, 2013: A Study Assessing the Mechanics of the ‘All-in’ Fee’’ (Aug. 2014). VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 subject to more stringent reporting and audit requirements than a small plan, which likely files no or streamlined reports and undergoes no audits. Therefore with respect to reporting and audits, MEPs generally can offer substantial savings to employers that would otherwise be subject to stringent reporting and audit requirements in their own plan and modest savings to small employers that would not be subject to such requirements. In fact, under some circumstances small employers might actually incur slightly higher reporting and audit costs by joining a MEP. This cost increase may still be offset by benefits described in other sections. From a broader point of view, if auditing becomes more prevalent because small employers join MEPs, that would lead to more and better quality data that would improve security for employers, participants and beneficiaries. Sponsors of ERISA-covered retirement plans generally must file a Form 5500 annually, including all required schedules and attachments. The cost burden incurred to satisfy the Form 5500 related reporting requirements varies by plan type, size, and complexity. Analyzing the 2016 Form 5500 filings, the Department estimates that the average cost to file the Form 5500 is as follows: $276 Per filer for small (generally fewer than 100 plan participants) single-employer DC plans eligible for Form 5500–SF, $435 per filer for small single-employer DC plans not eligible to file Form 5500–SF, and $1,686 per filer for large (generally 100 participants or more) single-employer DC plans. Additional schedules and reporting may be required for large and complex plans. For example, large retirement plans are required to attach auditor’s reports with Form 5500. Most small plans are not required to attach such reports.97 Hiring an auditor and 97 Under certain circumstances, some small plans may still need to attach auditor’s reports. For more details, see https://www.dol.gov/sites/default/files/ ebsa/employers-and-advisers/plan-administrationand-compliance/reporting-and-filing/form-5500/ 2017-instructions.pdf. In 2015, approximately 3,600 PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 obtaining an audit report can be costly for plans, and audit fees may increase as plans get larger or more complex. A recent report states that the fee to audit a 401(k) plan ranges between $6,500 and $13,000.98 One comment letter responding to the proposal reported that their audit cost $24,000.99 Incorporating the comment, the Department adjusted the estimated audit cost range.100 The Department uses the intermediate value of $13,000 as the estimated audit cost in order to calculate cost savings estimates. If an employer joins a MEP, it can save some costs associated with filing Form 5500 and fulfilling audit requirements because a MEP is a single plan. Thus, one Form 5500 and audit report will satisfy the reporting requirements. This means each participating employer would not need to file its own, separate Form 5500 and, for large plans or those few small plans that do not meet the small plan audit waiver, an audit report. According to a GAO report, most of the association MEPs that they interviewed had over 100 participating employers.101 PEOs also tend to have a large number of client employers, at least 400 participating employers in their PEOsponsored DC plans.102 Assuming reporting costs are equally shared by participating employers within a MEP, an employer joining a MEP can save virtually all the reporting costs discussed above. As PEOs seem to have, on average, more participating employers than associations, an employer might save slightly more by joining a PEO MEP compared to joining small plans that filed the Form 5500 and not the Form 5500–SF submitted audit reports as part of their Form 5500 filing. 98 See https://www.thayerpartnersllc.com/blog/ the-hidden-costs-of-a-401k-audit. 99 See comment letter #6 Employers Association of New Jersey, EANJ. 100 In estimating the range of the audit cost, $6,500 is assumed to be a lower end, $24,000 is assumed to be a higher end, and $13,000 is assumed to be a good intermediate estimate. 101 U.S. Government Accountability Office, GAO– 12–665, ‘‘Federal Agencies Should Collect Data and Coordinate Oversight of Multiple Employer Plans,’’ (Sept. 2012) (https://www.gao.gov/products/GAO12-665). 102 Id. E:\FR\FM\31JYR3.SGM 31JYR3 37536 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES3 a group or association MEP, but the additional savings are minimal.103 Large plans could enjoy even higher cost savings if audit costs are taken into account. The Department estimates that reporting cost savings associated with Form 5500 and an audit report would be approximately $14,539 per year for a large plan joining an association MEP and $14,649 per year for a large plan joining a PEO MEP.104 The extent to which small plans experience costs savings from joining a MEP may not be as large as discussed above.105 This is because small plans eligible for Form 5500–SF bear relatively less burden and generally are not required to conduct audits. By joining a MEP, however, those small plans would share the MEP’s cost of audits and more complicated Form 5500 filings. For lower audit costs or for small plans not eligible to file Form 5500–SF, joining a MEP could yield higher savings. Similarly, it is less clear whether the self-employed will experience large reporting cost savings by joining a MEP. The Department estimates these potential cost savings by comparing the reporting costs of an employer that participates in a MEP rather than sponsoring its own plan. Several retirement savings options are already available for self-employed persons and most have minimal or no reporting requirements. For example, both SEP 103 In terms of cost savings associated with Form 5500 filings without accounting for audit costs, cost savings for small single-employer DC plans filing Form 5500–SF would be $259.50 per filer if it joins an association-sponsored MEP or $272.15 per filer if it joins a PEO-sponsored MEP; for small single employer DC plans not eligible for Form 5500–SF cost savings would be $417.76 per filer if it joins an association-sponsored MEP as opposed to $430.40 per filer if it joins a PEO-sponsored MEP; for large single employer DC plans cost savings would be $1,668.91 per filer if it joins an association-sponsored MEP as opposed to $1,681.55 per filer if it joins a PEO-sponsored MEP. 104 These are estimated using an estimated audit cost of $13,000. If the lower end of the audit cost, $6,500 is assumed, then the estimated annual cost savings are $8,104 per filer (for an association MEP) or $8,165 per filer (for a PEO MEP). If the information provided by the commenter, $24,000, is assumed as the audit cost, then the estimated annual cost savings significantly increase to $25,429 per filer (for an association MEP) or $25,622 per filer (for a PEO MEP). 105 For example, assuming audit costs of $13,000, then a small plan eligible for Form 5500–SF would save $130 by joining an association MEP or $240 by joining a PEO MEP. If the lower-end audit cost of $6,500 is assumed, a small plan eligible for Form 5500–SF would save $195 by joining an association MEP or $256 by joining a PEO MEP. If the higherend audit costs, $24,000 is assumed, a small plan eligible for Form 5500–SF would save $20 by joining an association MEP or $212 by joining a PEO MEP. In general, a small plan not eligible to file Form 5500–SF would experience higher cost savings than a small plan eligible to file Form 5500– SF. VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 IRA and SIMPLE IRA plans are available for small employers and the selfemployed, and neither option requires Form 5500 filings.106 Solo 401(k) plans are also available for self-employed persons, and they may be exempt from Form 5500–EZ reporting requirement if the plans assets are less than $250,000.107 Thus, if self-employed individuals join a MEP, they will be unlikely to realize reporting costs savings. In fact, it is possible that their reporting costs will slightly increase, because the self-employed would share reporting costs with other MEP participating employers that they otherwise would not incur. Compared to the alternative of sponsoring single-employer plans, joining a MEP may not save small employers and the self-employed as much as larger employers. Reporting and audit costs, however, are only a part of the costs associated with providing retirement plans. As discussed in other sections, MEPs provides participating employers with other benefits and cost savings. Employers will decide whether to join MEPs based on a broad array of factors. The Department’s estimated reporting and audit cost savings is based on the assumption that all participating employers share costs equally regardless of their size. Thus, these estimated cost savings imply how much, on average, participating employers would save in reporting and audit costs. If a MEP adopts a fee arrangement where costs are distributed among participating employers according to their size, smaller employers could experience higher reporting cost savings than those estimated above. One commenter supported a tiered pricing arrangement over a level fee arrangement, making the assertion that tiered pricing leads to a more equitable distribution among participating employers.108 106 SEPs that conform to the alternative method of compliance in 29 CFR 2520.104–48 or 2520.104– 49 do not have to file a Form 5500; SIMPLEs do not have to file. For more detailed reporting requirements for SEPs and SIMPLE IRAs, see https://www.irs.gov/pub/irs-tege/forum15_sep_ simple_avoiding_pitfalls.pdf; see also https:// www.irs.gov/retirement-plans/retirement-plans-forself-employed-people. 107 Sometimes solo 401(k) is called as ‘‘individual 401(k),’’ or ‘‘one-participant 401(k)’’ or ‘‘uni401(k).’’ For more information about solo-401(k) plans, including reporting requirements, see https:// www.irs.gov/retirement-plans/one-participant-401kplans. Because solo 401(k) plans do not cover any common law employees, they are not required to file an annual report under title I of ERISA, but must file a return under the Code. Such plans may be able to file a Form 5500–SF electronically to satisfy the requirement to file a Form 5500–EZ with the IRS. 108 See comment letter #47 Slavic 401K. PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 d. Reduced Bonding Costs The potential for bonding cost savings in MEPs merits separate attention. As noted above, ERISA section 412 and related regulations 109 generally require every fiduciary of an employee benefit plan and every person who handles funds or other property of such plan to be bonded. ERISA’s bonding requirements are intended to protect employee benefit plans from risk of loss due to fraud or dishonesty on the part of persons who handle plan funds or other property, generally referred to as plan officials. A plan official must be bonded for at least 10 percent of the amount of funds he or she handles, subject to a minimum bond amount of $1,000 per plan with respect to which the plan official has handling functions. In most instances, the maximum bond amount that can be required under ERISA with respect to any one plan official is $500,000 per plan; however, the maximum required bond amount is $1,000,000 for plan officials of plans that hold employer securities.110 Under the final rule, MEPs generally should enjoy lower bonding costs than would an otherwise equivalent collection of smaller, separate plans, for two reasons. First, it might be less expensive to buy one bond covering a large number of individuals who handle plan funds than a large number of bonds covering the same individuals separately or in smaller more numerous groups. Second, the number of people handling plan funds and therefore subject to ERISA’s bonding requirement in the context of a MEP may be smaller than in the context of an otherwise equivalent collection of smaller, separate plans. e. Increased Retirement Savings The various effects of this final rule should lead in aggregate to increased retirement savings. As discussed above, many workers likely will go from not having any access to a retirement plan to having access through a MEP. This has the potential to result in an increase in retirement savings, on average, for this group of workers. While some workers may choose not to participate, surveys indicate that a large number could. For a defined contribution pension plan, about 73 percent of all workers with access take up the plan.111 109 29 CFR 2550.412–1 and 29 CFR part 2580. DOL Field Assistance Bulletin 2008–04, https://www.dol.gov/agencies/ebsa/employers-andadvisers/guidance/field-assistance-bulletins/200804. 111 These statistics apply to private industry. U.S. Bureau of Labor Statistics, National Compensation Survey, Employee Benefits in the United States (March 2018). 110 See E:\FR\FM\31JYR3.SGM 31JYR3 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations Among workers whose salary tends to be in the lowest 10 percent of the salary range, this figure is about 40 percent.112 One reason that these take-up rates are relatively high is that many plans use automatic enrollment to enroll newly hired workers, as well as, sometimes, existing workers. Automatic enrollment is particularly prevalent among large plans; in 2017 about 74 percent of plans with 1,000–4,999 participants use automatic enrollment, while only about 27 percent of plans with 1–49 participants do.113 MEPs often allow participating employers to decide whether they want to use automatic enrollment and to select their other plan design features. It is unclear, however, whether employers participating in MEPs formed under this final rule will be more likely than employers sponsoring single-employer DC plans to use automatic enrollment. Some workers may be saving in an IRA, either in an employer-sponsored IRA, payroll deduction IRA, or on their own. If they begin participating in a MEP 401(k), they would have the opportunity to take advantage of higher contribution limits, and some might begin receiving employer contributions. In general, MEPs could offer participants a way to save for retirement with lower fees. In particular, the fees are likely to be lower than in most small plans and in retail IRAs. The savings in fees could result in higher investment returns and thus higher retirement savings. f. Improved Portability In an economy where workers may change jobs many times over their career, portability of retirement savings is an important feature that can help workers keep track of their savings, retain tax-qualified status, and gain access to the investment options and fees that they desire. Some plan sponsors are not willing to accept rollovers from other qualified plans, which impedes portability. This is seen more often among small plan sponsors that do not want to confront the administrative burden and complexity associated with processing rollovers.114 112 Id. jbell on DSK3GLQ082PROD with RULES3 113 Plan Sponsor Council of America, ‘‘61st Annual Survey of Profit Sharing and 401(k) Plans, Reflecting 2017 Plan Experience’’ (2018), Table 111. 114 A survey of plan sponsors indicates that in 2017, about 86 percent of 401(k) plans with 1–49 participants accepted rollovers from other plans. Among larger plans, the figure is higher; for example, approximately 97 percent of plans with 1,000–4,999 participants accept rollovers. The full details are more complex because many 401(k) plans responding yes accept rollover from some sources, such as another 401(k) plan, but not others, such as a defined benefit pension or an IRA. Id., Table 37. VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 While some MEPs may allow participating employers to choose whether to accept rollovers from other qualified plans, it is likely that more participating employers will be willing to do so since the MEP sponsor will handle the administration. It is also possible that some MEPs will be designed such that all participating employers accept rollovers. Moreover, MEPs could facilitate increased portability for employees that leave employment to work for another employer that adopted the same MEP.115 This might occur when the employers that adopted the MEP are in the same industry or are located in the same geographic area. g. Increased Labor Market Efficiency The increased prevalence of MEPs would allow small employers the opportunity to offer retirement benefits that are comparable to those provided by large employers. Since employees value retirement benefits, this development would tend to shift talented employees toward small businesses. Such a shift would make small businesses more competitive. The reallocation of talent across different sectors of the economy would increase efficiency.116 h. Improved Data Collection This final rule also has the potential to improve the Department’s data collection for purposes of ERISA enforcement. As noted above, the expansion of MEPs is likely to lead some employers who currently file their own Forms 5500 117 as participating employers in a MEP to belong to a MEP that files a single Form 5500. Since MEPs are usually large plans, they likely will have a much more detailed filing with the associated schedules including an audit report. This filing will tend to contain higher quality, more accurate data than the Department currently receives when a collection of participating employers files as singleemployer plans. That is because (1) the required filing for plans with more than 100 participants requires more detail and (2) participating employers will be 115 Paul M. Secunda, ‘‘Uber Retirement,’’ Marquette Law School Legal Studies Paper No. 17– 1, (Jan. 2017). 116 John J. Kalamarides, Robert J. Doyle, and Bennett Kleinberg, ‘‘Multiple Employer Plans: Expanding Retirement Savings Opportunities,’’ Prudential (Feb. 2017). 117 Although the participating employers are filing their own Forms 5500 (or Forms 5500–SF), the MEP may be providing Form 5500 preparation and filing services for all the participating employers and be acting as a ‘‘batch submitter’’ and otherwise taking advantage of certain economies of scale. PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 37537 included in an audit when they were not previously. The same situation occurs when a small employer who is currently sponsoring a single-employer plan joins a large MEP in the future. When auditing becomes more prevalent, the increased oversight should help to prevent fraud and abuse. On the whole, the final rule will lead to more robust data collection for the Department to use in conducting its research, oversight, and enforcement responsibilities under ERISA. The Department also believes that this final rule will substantially improve the quality of information the Department collects. For example, the Department has encountered instances of participating employers in a MEP filing separate Forms 5500 that fail to account properly for each employer’s financial and demographic information on a granular enough level to accurately report its proportion of the whole MEP. The Department has at times received identical filings for each participating employer within a MEP. This duplication can lead to an overstatement or understatement of participant counts, amount of assets, amount of fees, and other important financial and demographic data for the participating employers in some MEPs. 6. Costs The final rule does not impose any direct costs because it merely clarifies which persons may act as an ‘‘employer’’ within the meaning of section 3(5) of ERISA in sponsoring a MEP. The rule imposes no mandates but rather is permissive relative to baseline conditions. Concerns have been expressed, however, that MEPs could be vulnerable to abuse, such as fraud, mishandling of plan assets or charging excessive fees. Abuses might result from the fact that employers are not directly overseeing the plan. For example, employers acting as plan sponsors of single-employer plans can be effective fiduciaries as they have incentives to protect their plans. In the case of a MEP, however, an adopting employer will have limited fiduciary duties and may assume other participating employers are more thoroughly policing the plan. In fact, GAO found that some MEPs’ marketing materials, and even MEP representatives, mislead employers about fiduciary responsibilities with claims that joining a MEP removes their fiduciary responsibility entirely.118 Less 118 U.S. Government Accountability Office, GAO, ‘‘12–665, ‘‘Private Sector Pensions—Federal Agencies Should Collect Data and Coordinate Oversight of Multiple Employer Plans,’’ (Sept. 2012) (https://www.gao.gov/products/GAO-12-665). E:\FR\FM\31JYR3.SGM 31JYR3 jbell on DSK3GLQ082PROD with RULES3 37538 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations monitoring provides an environment where abuses can occur. On the other hand, having multiple participating employers monitoring a MEP plan sponsor may actually lead to heightened protections for the collective. MEPs have the potential to build up a substantial amount of assets quickly, particularly where employers that already offer plans join MEPs and transfer existing retirement assets to the MEP, thus making them a target for fraud and abuse. Because the assets are used to fund future retirement distributions, such fraudulent schemes could be hidden or difficult to detect for a long period. A 2012 GAO report regarding federal oversight of data and coordination of MEPs discusses potential abuses by MEPs, such as charging excessive fees or mishandling plan assets.119 If MEPs are at greater risk for fraud and abuse than singleemployer plans, and some employers who are currently sponsoring singleemployer retirement plans decide to join a MEP more participants and their assets could be at greater risk of fraud and abuse. But single-employer DC plans are also vulnerable to these abuses and to mismanagement, and some MEPs may be more secure than some singleemployer plans. The Department is not aware of any direct information indicating whether the risk for fraud and abuse is greater for MEPs than other plans, nor did it receive information on this topic in the comments submitted in response to the proposal. Many small employers have relationships based on trust with trade associations that the Department expects to sponsor MEPs under the final rule, and those associations have an interest in maintaining these trust relationships by ensuring that fraud does not occur in MEPs they sponsor. Nevertheless, employers exercise a fiduciary duty in choosing to begin and continue participating in a MEP and should exercise appropriate care, prudence, and loyalty to ensure that the MEP is sponsored and operated by high quality, reputable providers. The Department does not have a basis to believe that there will be increased risk of fraud and abuse due to the final rule’s PEO provisions. As stated earlier in the preamble, the final rule requires PEOs to have substantial control over the functions and activities of the MEP, as the plan sponsor (within the meaning of section 3(16)(B) of ERISA), the plan administrator (within the meaning of section 3(16)(A) of ERISA), and a named fiduciary (within the meaning of section 402 of ERISA). Requiring PEOs to act as 119 Id. VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 MEP fiduciaries mitigates fraud concerns related to the expansion of PEO-sponsored plans, because the final rule ensures that PEOs will assume ERISA fiduciary status and bear all associated responsibilities. 7. Transfers Several transfers are possible as a result of this final rule. To the extent the expansion of MEPs leads employers that previously sponsored other types of retirement plans to terminate or freeze these plans and adopt a MEP, there may be a transfer between the employer and the employees, although the direction of the transfer is unclear. Additionally, if employers terminate or freeze other plans to enroll in a MEP, and if that MEP utilizes different service providers and asset types than the terminated plan, those different service providers would experience gains or losses of income or market share. Service providers that specialize in providing services to MEPs might benefit at the expense of other providers who specialize in providing services to small plans. The rule could also result in asset transfers if MEPs invest in different types of assets than small plans. For example, small plans tend to rely more on mutual funds, while larger plans have greater access to other types of investment vehicles such as bank common collective trusts and insurance company pooled separate accounts, which allow for specialization and plan specific fees. This movement of assets could see profits move from mutual funds to other types of investment managers. Finally, the Code generally gives tax advantages to certain retirement savings over most other forms of savings.120 Consequently, all else being equal, a worker who is saving money in tax qualified retirement savings vehicles generally can enjoy higher lifetime consumption and wealth than one who does not. The magnitude of the relative advantage generally depends on the worker’s tax bracket, the amount contributed to the plan, the timing of contributions and withdrawals, and the investment performance of the assets in the account. Workers that do not contribute to a qualified retirement 120 Employer contributions to qualified pension plans and, generally, employee contributions made at the election of the employee through salary reduction are not taxed until distributed to the employee, and income earned on those amounts is not taxed until distributed. The tax expenditure for ‘‘net exclusion of pension contributions and earnings’’ is computed as the income taxes forgone on current tax-excluded pension contributions and earnings less the income taxes paid on current pension distributions. PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 savings vehicle due to lack of access to a workplace retirement plan do not reap this relative advantage. This rule would likely increase the number of American workers with access to a tax-qualified workplace retirement plan, which would spread this financial advantage to some people who are not currently receiving it. If access to retirement plans and savings increase as a result of this final rule, a transfer will occur flowing from all taxpayers to those individuals receiving tax preferences as a result of new and increased retirement savings. 8. Impact on the Federal Budget The effects of the rule on the federal budget are uncertain. Because the rule increases access to retirement plans, retirement savings likely also will increase. Given the tax deferral associated with retirement savings, tax revenues would likely decrease in the short run. The vast majority of dollars being contributed to defined contribution plans are pre-tax rather than Roth contributions. Pre-tax contributions include approximately 95 percent of participant contributions 121 and all employer contributions. To the degree that Roth contributions may become more common in the future, there would be less short-term reduction in federal revenue. If people begin saving more for retirement, it is unclear if that would be accompanied by people consuming less, taking on more debt, saving less in nonretirement accounts, or saving less for retirement during future working years. Consequently, the long run net changes in consumption and investment, and the effect on the federal budget, are uncertain. 9. Uncertainty As discussed above, the Department expects this rule to expand workers’ access to employment-based retirement plans by easing the burden of offering retirement benefits for employers— particularly small employers. However, the exact extent to which access to employment-based retirement plans will increase under this final rule is uncertain. Several reports suggest that, although important, employers may not consider offering retirement plans a priority as compared to other types of benefits. The most commonly offered benefit is paid leave, followed by health insurance; retirement plans rank third.122 This 121 This estimate refers to 2014, the most recent year available. IRS, Statistics of Income Division, Form W–2 study, February 2018, Table 7.A. 122 Board of Governors of the Federal Reserve System, ‘‘Report on the Economic Well-Being of U.S. Households in 2017’’ (May 2018). E:\FR\FM\31JYR3.SGM 31JYR3 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES3 order holds true for small employers, as well.123 Another survey of employers confirms that small employers offer health insurance more often than retirement plans.124 That study also suggests that company earnings and the number of employees affect the decision of whether or not to offer retirement plans. Employers that experience increases in earnings or the number of employees are more likely to offer retirement plans.125 The top reason provided for employers to start offering a retirement plan is an increase in business profits.126 Similarly, in another survey, employers not offering retirement plans cited ‘‘the company is not big enough’’ most frequently as the reason.127 Although this rule will make it easier and less costly for employers to offer a workplace retirement savings vehicle, these surveys suggest that small employers are not likely to adopt a MEP unless their business is in a strong financial position and generating sufficient revenue streams. Also, it can be quite challenging for a small employer or self-employed individual to determine which plan is most appropriate. Business owners must understand the characteristics and features of the available options in order to choose the most suitable plan. A discussion of some of these options and their features follows. SEP: Simplified Employee Pensions can be established by sole proprietors, partnerships, and corporations to provide retirement plan coverage to employees. SEPs must be offered to all employees who are at least 21 years old, were employed by the employer in three out of the last five years, and received compensation for the year ($600 for 2019 128). SEPs are completely employer funded and they cannot accept employee contributions.129 Each year the employer can set the level of contributions it wants to make, if any. The employer usually makes a contribution to each eligible employee’s 123 The Pew Charitable Trusts, ‘‘Employer Barriers to and Motivations for Offering Retirement Benefits,’’ 2017. 124 Transamerica Center for Retirement Studies, ‘‘All About Retirement: An Employer Survey, 17th Annual Transamerica Retirement Survey’’ (Aug. 2017). 125 The Pew Charitable Trusts, ‘‘Employer Barriers to and Motivations for Offering Retirement Benefits,’’ 2017. 126 Id. 127 Transamerica Center for Retirement Studies, ‘‘All About Retirement,’’ 2017. 128 IRS Notice 2018–83, 2018–47 I.R.B. 774 (11/ 19/2018). 129 This rule does not apply to a SEP in effect on December 31, 1996, if the SEP provided for pre-tax employee contributions (commonly referred to as a SARSEP) as of that date. VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 IRA (referred to as a SEP–IRA) that is equal to the same percentage of salary for each employee. The annual perparticipant contribution cannot exceed the lesser of 25 percent of compensation or $56,000 in 2019.130 Participants can withdraw funds from their SEP–IRA at any time subject to federal income taxes. A 10 percent additional tax may apply if the employee is under age 591⁄2. Participants cannot take loans from their SEP–IRAs. Generally, these plans are easy to set up; the business owner may use IRS Form 5305–SEP to establish the plan, and in some circumstances there are no set-up fees or annual maintenance charges. SEPs normally do not have to file a Form 5500. SIMPLE IRA Plan: The Savings Incentive Match Plan for Employees of Small Employers allows businesses with fewer than 100 employees to establish an IRA (referred to as a SIMPLE IRA) for each employee. The employer must make the plan available to all employees who received compensation of at least $5,000 in any prior two years and are reasonably expected to earn at least $5,000 in the current year. In 2019, employees are allowed to make salary deferral contributions up to the lesser of 100 percent of compensation or $13,000.131 Employees 50 or older may also make additional (‘‘catch-up’’) contributions of up to $3,000.132 The employer also must generally make a matching contribution dollar-for-dollar for employee contributions up to three percent of compensation (or a nonelective contribution set at two percent of compensation up to no more than $280,000 of compensation in 2019).133 Participants can withdraw funds from their SIMPLE IRAs at any time subject to federal income taxes. A 25 percent additional tax may apply to withdrawals occurring within two years of commencing participation, if the participant is under age 591⁄2. A 10 percent additional tax may apply after the two-year period, if the participant is under age 591⁄2. Participants cannot take loans from their SIMPLE IRAs. Similar to SEPs, SIMPLE IRA plans are easy to set up and have few administrative burdens. The employer may use IRS Form 5304–SIMPLE or 5305–SIMPLE to set up the plan, and there is no annual filing requirement for the employer. Banks or other financial 130 IRS Notice 2018–83, 2018–47 I.R.B. 774 (11/ 19/2018). 131 Id. 132 Id. 133 Id. PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 37539 institutions handle most of the paperwork. Similar to SEPs, some companies offer to set up SIMPLE IRA plans with no set-up fees or annual maintenance charges. Payroll Deduction IRAs: An easy way for small employers to provide their employees with an opportunity to save for retirement is by establishing payroll deduction IRAs. Many people not covered by a workplace retirement plan could save through an IRA, but do not do so on their own. A payroll deduction IRA at work can simplify the process and encourage employees to get started. The employer sets up the payroll deduction IRA program with a bank, insurance company or other financial institution. Then each employee chooses whether to participate and if so, the amount of payroll deduction for contribution to the IRA. Employees are always 100 percent vested in (have ownership in) all the funds in their IRAs. Participant loans are not permitted. Withdrawals are permitted anytime, but they are subject to income tax (except for certain distributions from Roth IRAs and the portion of a distribution that constitutes the distribution of after-tax contributions from nondeductible IRAs). A 10 percent additional tax may apply if the employee is under age 591⁄2. Employees’ contributions are limited to $6,000 for 2019.134 Additional ‘‘catch-up’’ contributions of $1,000 per year are permitted for employees age 50 or over.135 Employees control where their money is invested and also bear the investment risk. Payroll deduction IRAs are not covered by ERISA if: • No contributions are made by the employer; • Participation is completely voluntary for employees; • The employer’s sole involvement in the program is to permit the IRA provider to publicize the program to employees without endorsement, to collect contributions through payroll deductions, and to remit them to the IRA provider; and • The employer receives no consideration in the form of cash or otherwise, other than reasonable compensation for services actually rendered in connection with payroll deductions.136 Solo 401(k): Self-employed individuals with no employees other than themselves and their spouses may establish a 401(k) plan, colloquially referred to as a solo 401(k). As an 134 Id. 135 IRC 136 29 E:\FR\FM\31JYR3.SGM section 219(b)(5)(B). CFR 2510.3–2(d). 31JYR3 jbell on DSK3GLQ082PROD with RULES3 37540 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations employee, a self-employed individual may make salary deferrals up to the lesser of 100 percent of compensation or $19,000 in 2019.137 They also can make nonelective contributions up to 25 percent of compensation provided that, when added to any salary deferrals, the total contribution does not exceed the lesser of 100 percent of a participant’s compensation or $56,000 138 (for 2019). In addition, those aged 50 or older can make additional (‘‘catch-up’’) contributions of up to $6,000. Withdrawals are permitted only upon the occurrence of a specified event (retirement, plan termination, etc.), and they are subject to federal income taxes. A 10 percent additional tax may apply if the participant is under age 591⁄2. The plan may permit loans and hardship withdrawals. Solo 401(k) plans are more administratively burdensome than other types of plans available to small employers. A model form is not available to establish the plan. A Form 5500 must be filed when plan assets exceed $250,000. Credit for Pension Start-Up Costs: A tax credit is available for small employers to claim part of the ordinary and necessary costs to start a SEP, SIMPLE IRA, or 401(k) plan. To be eligible for the credit, an employer must have had no more than 100 employees who received at least $5,000 of compensation from the employer during the tax year preceding the first credit year. The credit is limited to 50 percent of the qualified cost to set up and administer the plan, up to a maximum of $500 per year for each of the first three years of the plan.139 Saver’s Credit: A nonrefundable tax credit for certain low- and moderateincome individuals, including selfemployed individuals, who contribute to their plans is also available. The amount of the Saver’s Credit is 50 percent, 20 percent, or 10 percent of the participant’s contribution to an IRA, or an employer-sponsored retirement plan such as a 401(k), depending on the individual’s adjusted gross income (reported on Form 1040 series return). The maximum annual contribution eligible for the credit is $2,000 ($4,000 if married filing jointly).140 Discussion: The options discussed above may better serve an employer’s needs than a MEP would in some circumstances. Some companies offer to 137 IRC section 402(g). IRS Notice 2018–83, 2018– 47 I.R.B. 774 (11/19/2018). 138 IRC section 415(c). IRS Notice 2018–83, 2018– 47 I.R.B. 774 (11/19/2018). 139 IRC section 45E(b). 140 IRC section 25B. VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 set up solo 401(k) plans with no set-up fees.141 Despite these currently available options for self-employed workers, about 94 percent of self-employed workers did not participate in retirement plans in 2013.142 Although these low levels of take-up with these other options create some uncertainty that this rule will persuade many selfemployed individuals to join a MEP, this uncertainty alone is no basis to ignore MEPs’ potential to improve the retirement preparedness of America’s workers. SEP and SIMPLE IRA plans, for example, could meet the needs of many small employers. As discussed above, they are easy to set up and have low start-up and administrative costs. Furthermore, small employers can claim tax credits for part of the costs of starting up SEP or SIMPLE IRA plans, and certain employees may take advantage of the Saver’s Credit. Despite these advantageous features, these plans did not gain much traction in the market. It is possible that, similar to existing options, MEPs will only be modestly attractive to small employers, resulting in only a small increase in retirement coverage. In addition to these plan options, there are other ways that existing small employers can offer retirement plans at low costs. For micro plans with assets less than $5 million, employers can use providers of bundled financial services that include both payroll and recordkeeping services on their 401(k) products. In 2016, about 69 percent of plans with less than $1 million in assets used these bundled providers.143 Given that multiple low-cost options already exist for small employers, the Department is uncertain to what degree small employers and their workers would benefit from also having the option to join various MEPs, but it expects that the increased availability of plans will provide these employers and their workers with greater access to retirement plans. Although this rule would ease the burden on employers, particularly small employers, in offering retirement plans for their workers, it is uncertain how many more employers would offer retirement plans to their workers and how many more employees would chose to participate in those retirement plans. To begin, workers employed by 141 Kerry Hannon, ‘‘The Best Retirement Plans for the Self-Employed.’’ Forbes, (April 1, 2011). 142 Copeland, ‘‘Employment-Based Retirement Plan Participation, 2013.’’ 143 Cerulli Associates, U.S. Retirement Markets 2016 (available at https://www.cerulli.com/vapi/ public/getcerullifile?filecid=Cerulli-US-RetirementMarkets-2016-Information-Packet). PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 small employers not offering retirement plans tend to be younger workers, lower-paid workers, part-time workers, or immigrants,144 characteristics that at least one survey suggests reduce the lack of demand for retirement benefits.145 Indeed, one study found that large employers not sponsoring retirement plans tend to have similar characteristics among their employees: Higher proportions of part-time or partyear employees, younger employees, employees with lower earnings, and employees with less education. Several additional factors may influence employer participation in expanded or newly established MEPs. For large employers, even though the potential cost savings associated with filing Form 5500s and audit reports discussed earlier can be substantial, the savings may not be large enough to persuade them to join a MEP. Switching from an existing well-established plan to a MEP could be a difficult and costly procedure in the short term. In summary, there are many challenges and inherent uncertainties associated with efforts to expand the coverage of retirement plans, but this final rule would provide another opportunity for small employers and the self-employed to adopt a retirement savings plan. By reducing some of the burdens associated with setting up and administering retirement plans, this final rule should lower costs and encourage employers, particularly small employers, to establish a retirement savings plan for their workers. 10. Regulatory Alternatives As required by E.O. 12866, the Department considered various alternative approaches in developing this final rule, which are discussed below. Covering Other Types of MEPS: Executive Order 13847 called on the Department to consider whether businesses or organizations other than groups or associations of employers and PEOs should be able to sponsor a MEP by acting indirectly in the interest of participating employers in relation to the plan within the meaning of section 3(5) of ERISA. Consistent with the Executive Order, the Department specifically solicited public comments 144 Copeland, ‘‘Employment-Based Retirement Plan Participation, 2013.’’ Constantijn W.A. Panis & Michael J. Brien, ‘‘Target Populations of State-Level Automatic IRA Initiatives,’’ (August 28, 2015) (available at https://www.dol.gov/sites/default/files/ ebsa/researchers/analysis/retirement/targetpopulations-of-state-level-automatic-irainitiatives.pdf). 145 The Pew Charitable Trusts, ‘‘Employer Barriers to and Motivations for Offering Retirement Benefits,’’ 2017. E:\FR\FM\31JYR3.SGM 31JYR3 jbell on DSK3GLQ082PROD with RULES3 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations at the proposed rule stage regarding whether, and under what circumstances, it should address socalled ‘‘open MEPs’’ or ‘‘pooled employer plans.’’ These arrangements cover employees of employers with no relationship other than their joint participation in the MEP. The solicitation asked commenters who believe these arrangements should be addressed in this or a future rulemaking to include a discussion of why they should be treated as one employee benefit plan with the meaning of title I of ERISA rather than a collection of separate employer plans being serviced by a commercial enterprise that provides retirement plan products and services. As discussed earlier in the preamble, more than half of the comments received on the proposed rule addressed this issue, and the vast majority supported a rule that would facilitate these arrangements. After reviewing the comments, the Department is persuaded that open MEPs deserve further consideration. The Department received a variety of different ideas and comments, some of which were contradictory. Given the wide range of possibilities, the Department does not believe it has developed a sufficient public record, or obtained sufficient data, to understand thoroughly the complete range of issues presented by these arrangements. Therefore, the Department has published a RFI elsewhere in today’s Federal Register to develop a more robust public record and to obtain sufficient data to support a future rulemaking. The Department also solicited comments on whether the final rule should address the MEP status of socalled ‘‘corporate MEPs,’’ which are plans that cover employees of related employers that are not in the same controlled group or affiliated service group within the meaning of 414(b), (c), and (m) of the Code.146 While using the commonality of interest provisions in this final rule to determine bona fide group or association status may not be the appropriate path for corporate MEPs, the Department recognizes that meaningful levels of common ownership may serve as an indicator of genuine economic or representational interests unrelated to the provision of benefits among the ownership group, such that one or more of the group members is acting ‘‘indirectly in the 146 In Advisory Opinion 89–06A, the Department stated that it would consider a member of a controlled group that establishes a benefit plan for its employees and/or the employees of other members of the controlled group to be an employer within the meaning of ERISA section 3(5). VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 interest of’’ the others within the meaning of ERISA section 3(5) in sponsoring a MEP for the group’s participation. On the record established thus far, however, the Department lacks a meaningful basis on which to determine the precise level of ownership that conclusively distinguishes these bona fide ownership groups from commercial enterprises in which members have nominal ownership levels that exist primarily or solely to market, distribute, or otherwise provide employee benefits to members. The Department, therefore, also has decided to explore the corporate MEP topic in the RFI. PEO Safe Harbor: The proposed rule contained two regulatory safe harbors for PEOs to determine whether they will be considered as performing substantial employment functions on behalf of their client-employers. The first safe harbor provides that a PEO will satisfy the requirement if, among other things, it is a Certified PEO (CPEO) under the Code and meets at least two criteria in the list in paragraph (c)(2)(ii)(D) through (I) of the proposal. The second safe harbor is for PEOs that do not satisfy the CPEO safe harbor but meet five or more criteria from the list in paragraph (c)(2)(ii) of the proposal. In response to the proposed safe harbor, a commenter argued that the safe harbor standards should be the same for CPEOs and non-CPEOs and not more or less favorable for one business model rather than another. The commenter expressed concern that nonCPEOs would be unable to meet the ‘‘substantial employer functions’’ criteria in the proposed rule, and thus, unable to avail themselves of the nonCPEO safe harbor. The commenter viewed the proposal as favoring CPEOs and asserted that the Department should adopt a safe harbor that works for the entire PEO industry. As discussed earlier in the preamble, in response to the comment, the Department streamlined the safe harbor in the final rule by providing only one safe harbor that applies to CPEOs and non-CPEOs. The Department determined that the complexity inherent in the proposal’s safe harbor could be reduced by combining the essential elements of the two safe harbors into a single safe harbor that both CPEOs and non-CPEOs can rely on. The Department believes these changes will allow both CPEOs and non-CPEOs to meet the requirements of the safe harbor and provide optimum choices for employers that are considering joining MEPs sponsored by PEOs. Working Owner Definition: The final rule’s definition of a working owner PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 37541 requires a person to work a certain number of hours (i.e., 20 hours per week or 80 hours per month) or have wages or self-employment income above a certain level (i.e., wages or income must equal or exceed the working owner’s cost of coverage to participate in the group or association’s health plan if the individual is participating in that plan). In considering possible alternatives, the Department considered relying only on the hours worked threshold. However, the Department chose the formulation in this final rule (i.e., allowing either the hours worked threshold or the income level threshold), because it best clarified when a working owner could join a group or association retirement plan. Additionally, based on its expectation that certain groups and associations may offer both AHPs and MEPs, the Department chose this formulation because it parallels the working owner definition from the AHP Rule. 11. Paperwork Reduction Act The final rule is not subject to the requirements of the Paperwork Reduction Act of 1995 (PRA 95) (44 U.S.C. 3501 et seq.) because it does not contain a collection of information as defined in 44 U.S.C. 3502(3). 12. Regulatory Flexibility Act The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes certain requirements with respect to federal rules that are subject to the notice and comment requirements of section 553(b) of the Administrative Procedure Act (5 U.S.C. 551 et seq.) and that are likely to have a significant economic impact on a substantial number of small entities. Unless an agency determines that a final rule is not likely to have a significant economic impact on a substantial number of small entities, section 603 of the RFA requires the agency to present a final regulatory flexibility analysis (FRFA) of the final rule. The Department has determined that this final rule, which would clarify the persons that may act as an ‘‘employer’’ within the meaning of section 3(5) of ERISA in sponsoring a MEP, is likely to have a significant impact on a substantial number of small entities. Therefore, the Department provides its FRFA of the final rule below. a. Need for and Objectives of the Rule As discussed earlier in the preamble, the rule is necessary to expand access to MEPs, which could enable groups of private sector employers to participate in a collective retirement plan. MEPs meeting the requirements of the final rule are presented with an efficient E:\FR\FM\31JYR3.SGM 31JYR3 37542 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations option to reduce the costs and complexity associated with establishing and maintaining defined contribution plans. This could encourage more plan formation and broader availability of affordable workplace retirement savings plans, especially among small employers and certain working owners. Thus, the Department intends and expects that the rule will deliver benefits primarily to the employees of many small businesses and their families including many working owners, as well as many small businesses themselves. b. Affected Small Entities The Small Business Administration estimates that firms with 1–499 employees plus nonemployer firms comprise 99.9 percent of U.S. businesses.147 The rule applies to firms of all sizes. Small businesses, including sole proprietors, can join MEPs as long as they are eligible to do so and as long as the MEP sponsor meets the requirements of the rule. The Department believes that the smallest firms, those with less than 100 employees, are most likely to be attracted to the reduced costs and fiduciary responsibilities that are associated with offering retirement benefits through a MEP. The Department also believes that many selfemployed workers will find MEPs attractive. Approximately 8 million selfemployed workers between ages 21 and 70, representing six percent of all similarly aged workers, have no employees and usually work at least 20 hours per week. These self-employed workers will become eligible to join MEPs under the rule.148 jbell on DSK3GLQ082PROD with RULES3 c. Impact of the Rule As stated above, by expanding MEPs, this final rule will provide a more affordable option for retirement savings coverage for many small businesses, thereby potentially yielding economic benefits for participating small businesses and their employees. Some advantages of an ERISA-covered retirement plan (including MEPs, SEP– IRAs, and SIMPLE IRAs) over IRA-based savings options outside the workplace include: (1) Higher contribution limits, (2) potentially lower investment management fees, especially in larger 147 The Small Business Administration, Office of Advocacy, 2018 Small Business Profile. https:// www.sba.gov/sites/default/files/advocacy/2018Small-Business-Profiles-US.pdf. Last accessed on 10/03/2018. The SBA reports that there are 5,881,267 business with 1–499 employees. Many of these firms will have the option to join a MEP under this rule. 148 DOL tabulations of the February 2019 Current Population Survey basic monthly data. VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 plans, (3) a well-established uniform regulatory structure with important consumer protections, including fiduciary obligations, recordkeeping and disclosure requirements, legal accountability provisions, and spousal protections, (4) automatic enrollment, and (5) stronger protections from creditors. At the same time, they provide employers with choice among plan features and the flexibility to tailor retirement plans to meet their business and employment needs. There are no new recordkeeping or reporting requirements for compliance with the rule. In fact, the recordkeeping and reporting requirements would likely decrease for most small employers under the rule. For example, if an employer joins a MEP meeting the requirements of the rule, it can save some costs associated with filing Form 5500 and fulfilling audit requirements because a MEP is considered a single plan. Thus, one Form 5500 and audit report satisfies the reporting requirements. Accordingly, each participating employer would not need to file its own, separate Form 5500 and, for large plans or those few small plans that do not meet the small plan audit waiver, audit report. These reports are normally prepared by a combination of legal professionals, human resource professionals, and accountants. The Department considered several alternatives, such as whether to cover other types of MEPs, in developing its formulation of the PEO Safe Harbor. The ‘‘Regulatory Alternatives’’ section of the RIA above discusses these significant regulatory alternatives in more detail. rule is a ‘‘major rule’’ as that term is defined in 5 U.S.C. 804(2), because it is likely to result in an annual effect on the economy of $100 million or more. 14. Unfunded Mandates Reform Act Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104–4) requires each federal agency to prepare a written statement assessing the effects of any federal mandate in a proposed or final agency rule that may result in an expenditure of $100 million or more (adjusted annually for inflation with the base year 1995) in any one year by State, local, and tribal governments, in the aggregate, or by the private sector. For purposes of the Unfunded Mandates Reform Act, as well as Executive Order 12875, this final rule does not include any federal mandate that the Department expects will result in such expenditures by State, local, or tribal governments, or the private sector. This is because the rule merely clarifies which persons may act as an ‘‘employer’’ within the meaning of section 3(5) of ERISA in sponsoring a MEP and does not require any action or impose any requirement on the public sector or states. d. Duplicate, Overlapping, or Relevant Federal Rules The final rule would not conflict with any relevant federal rules. As discussed above, the rule will merely broaden the conditions under which the Department will view a group or association as acting as an ‘‘employer’’ under ERISA for purposes of offering a MEP and make clear the conditions for PEO sponsorship. As such, the criteria could also result in more MEPs being treated consistently under the Code and title I of ERISA, including MEPs administered by PEOs for the benefit of the employees of their client employers, as described in IRS Rev. Proc. 2002–21. 15. Federalism Statement Executive Order 13132 outlines fundamental principles of federalism. E.O. 13132 requires federal agencies to follow specific criteria in forming and implementing policies that have ‘‘substantial direct effects’’ on the States, the relationship between the national government and States, or on the distribution of power and responsibilities among the various levels of government. Federal agencies promulgating regulations that have federalism implications must consult with State and local officials and describe the extent of their consultation and the nature of the concerns of State and local officials in the preamble to the final rule. In the Department’s view, the final rule does not have federalism implications because it does not have a direct effect on the States, the relationship between the national government and the States, or on the distribution of power and responsibilities among various levels of government. 13. Congressional Review Act The final rule is subject to the Congressional Review Act (CRA) provisions of the Small Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et seq.) and will be transmitted to Congress and the Comptroller General for review. The 16. Executive Order 13771 Reducing Regulation and Controlling Regulatory Costs Executive Order 13771, titled Reducing Regulation and Controlling Regulatory Costs, was issued on January 30, 2017. This final rule is an E.O. 13771 deregulatory action, because it PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 E:\FR\FM\31JYR3.SGM 31JYR3 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations provides critical guidance that expands small businesses’ access to high quality retirement plans at lower costs than otherwise are available, by removing certain Department-imposed restrictions on the establishment and maintenance of MEPs under ERISA. List of Subjects in 29 CFR Part 2510 Employee benefit plans, Pensions. For the reasons stated in the preamble, the Department of Labor is amending 29 CFR part 2510 as follows: PART 2510—DEFINITIONS OF TERMS USED IN SUBCHAPTERS C, D, E, F, G, AND L OF THIS CHAPTER 1. The authority citation for part 2510 is revised to read as follows: ■ Authority: 29 U.S.C. 1002(1), 1002(2), 1002(3), 1002(5), 1002(16), 1002(21), 1002(37), 1002(38), 1002(40), 1002(42), 1031, and 1135; Secretary of Labor’s Order No. 1– 2011, 77 FR 1088 (Jan. 9, 2012); Sec. 2510.3– 101 and 2510.3–102 also issued under sec. 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. App. At 237 (2012), (E.O. 12108, 44 FR 1065 (Jan. 3, 1979) and 29 U.S.C. 1135 note. Sec. 2510.3–38 is also issued under sec. 1, Pub. L. 105–72, 111 Stat. 1457 (1997). 2. Section 2510.3–3 is amended by revising paragraph (c) introductory text to read as follows: ■ § 2510.3–3 Employee benefit plan. * * * * * (c) Employees. For purposes of this section and except as provided in § 2510.3–5(e) and § 2510.3–55(d): * * * * * ■ 3. Section 2510.3–5 is amended by revising the section heading to read as follows: § 2510.3–5 Definition of Employer— Association Health Plans. * * * * * 4. Section 2510.3–55 is added to read as follows: ■ jbell on DSK3GLQ082PROD with RULES3 § 2510.3–55 Definition of Employer— Association Retirement Plans and Other Multiple Employer Pension Benefit Plans. (a) In general. The purpose of this section is to clarify which persons may act as an ‘‘employer’’ within the meaning of section 3(5) of the Act in sponsoring a multiple employer defined contribution pension plan (hereinafter ‘‘MEP’’). The Act defines the term ‘‘employee pension benefit plan’’ in section 3(2), in relevant part, as any plan, fund, or program established or maintained by an employer, employee organization, or by both an employer and an employee organization, to the extent by its express terms or as a result of surrounding circumstances such plan, fund, or program provides VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 retirement income to employees or results in a deferral of income by employees for periods extending to the termination of covered employment or beyond. For purposes of being able to establish and maintain an employee pension benefit plan within the meaning of section 3(2), an ‘‘employer’’ under section 3(5) of the Act includes any person acting directly as an employer, or any person acting indirectly in the interest of an employer in relation to an employee benefit plan. A group or association of employers is specifically identified in section 3(5) of the Act as a person able to act directly or indirectly in the interest of an employer, including for purposes of establishing or maintaining an employee benefit plan. A bona fide group or association of employers (as defined in paragraph (b) of this section) and a bona fide professional employer organization (as described in paragraph (c) of this section) shall be deemed to be able to act in the interest of an employer within the meaning of section 3(5) of the Act by satisfying the criteria set forth in paragraphs (b) and (c) of this section, respectively. (b)(1) Bona fide group or association of employers. For purposes of title I of the Act and this chapter, a bona fide group or association of employers capable of establishing a MEP shall include a group or association of employers that meets the following requirements: (i) The primary purpose of the group or association may be to offer and provide MEP coverage to its employer members and their employees; however, the group or association also must have at least one substantial business purpose unrelated to offering and providing MEP coverage or other employee benefits to its employer members and their employees. For purposes of satisfying the standard of this paragraph (b)(1)(i), as a safe harbor, a substantial business purpose is considered to exist if the group or association would be a viable entity in the absence of sponsoring an employee benefit plan. For purposes of this paragraph (b)(1)(i), a business purpose includes promoting common business interests of its members or the common economic interests in a given trade or employer community and is not required to be a for-profit activity; (ii) Each employer member of the group or association participating in the plan is a person acting directly as an employer of at least one employee who is a participant covered under the plan; (iii) The group or association has a formal organizational structure with a governing body and has by-laws or other similar indications of formality; PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 37543 (iv) The functions and activities of the group or association are controlled by its employer members, and the group’s or association’s employer members that participate in the plan control the plan. Control must be present both in form and in substance; (v) The employer members have a commonality of interest as described in paragraph (b)(2) of this section; (vi) The group or association does not make plan participation through the association available other than to employees and former employees of employer members, and their beneficiaries; and (vii) The group or association is not a bank or trust company, insurance issuer, broker-dealer, or other similar financial services firm (including a pension recordkeeper or third-party administrator), or owned or controlled by such an entity or any subsidiary or affiliate of such an entity, other than to the extent such an entity, subsidiary or affiliate participates in the group or association in its capacity as an employer member of the group or association. (2) Commonality of interest. (i) Employer members of a group or association will be treated as having a commonality of interest if either: (A) The employers are in the same trade, industry, line of business or profession; or (B) Each employer has a principal place of business in the same region that does not exceed the boundaries of a single State or a metropolitan area (even if the metropolitan area includes more than one State). (ii) In the case of a group or association that is sponsoring a MEP under this section and that is itself an employer member of the group or association, the group or association will be deemed for purposes of paragraph (b)(2)(i)(A) of this section to be in the same trade, industry, line of business, or profession, as applicable, as the other employer members of the group or association. (c)(1) Bona fide professional employer organization. A professional employer organization (PEO) is a human-resource company that contractually assumes certain employer responsibilities of its client employers. For purposes of title I of the Act and this chapter, a bona fide PEO is capable of establishing a MEP. A bona fide PEO is an organization that meets the following requirements: (i) The PEO performs substantial employment functions on behalf of its client employers that adopt the MEP, and maintains adequate records relating to such functions; E:\FR\FM\31JYR3.SGM 31JYR3 37544 Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES3 (ii) The PEO has substantial control over the functions and activities of the MEP, as the plan sponsor (within the meaning of section 3(16)(B) of the Act), the plan administrator (within the meaning of section 3(16)(A) of the Act), and a named fiduciary (within the meaning of section 402 of the Act), and continues to have employee-benefitplan obligations to MEP participants after the client employer no longer contracts with the organization. (iii) The PEO ensures that each client employer that adopts the MEP acts directly as an employer of at least one employee who is a participant covered under the MEP; and (iv) The PEO ensures that participation in the MEP is available only to employees and former employees of the PEO and client employers, employees and former employees of former client employers who became participants during the contract period between the PEO and former client employers, and their beneficiaries. (2) Safe harbor criteria for substantial employment functions. For purposes of paragraph (c)(1)(i) of this section, whether a PEO performs substantial employment functions on behalf of its client employers is determined on the basis of the facts and circumstances of the particular situation. As a safe harbor, a PEO shall be considered to perform substantial employment functions on behalf of its clientemployers that adopt the MEP if it meets the following criteria with respect to each client-employer employee that participates in the MEP— (i) The PEO assumes responsibility for and pays wages to employees of its client-employers that adopt the MEP, without regard to the receipt or adequacy of payment from those client employers; (ii) The PEO assumes responsibility for and reports, withholds, and pays any applicable federal employment taxes for its client employers that adopt the MEP, without regard to the receipt or adequacy of payment from those client employers; (iii) The PEO plays a definite and contractually specified role in recruiting, hiring, and firing workers of its client-employers that adopt the MEP, in addition to the client-employer’s responsibility for recruiting, hiring, and VerDate Sep<11>2014 21:42 Jul 30, 2019 Jkt 247001 firing workers. A PEO is considered to satisfy this standard if it recruits, hires, and fires, assumes responsibility for recruiting, hiring, and firing, or retains the right to recruit, hire, and fire workers of its client-employers that adopt the MEP, in addition to the clientemployer’s responsibility for recruiting, hiring, and firing workers; and (iv) The PEO assumes responsibility for and has substantial control over the functions and activities of any employee benefits which the service contract may require the PEO to provide, without regard to the receipt or adequacy of payment from those client employers for such benefits. (d) Dual treatment of working owners as employers and employees. (1) A working owner of a trade or business without common law employees may qualify as both an employer and as an employee of the trade or business for purposes of the requirements in paragraph (b) of this section, including the requirement in paragraph (b)(1)(ii) of this section that each employer member of the group or association adopting the MEP must be a person acting directly as an employer of one or more employees who are participants covered under the MEP, and the requirement in paragraph (b)(1)(vi) of this section that the group or association does not make participation through the group or association available other than to certain employees and former employees and their beneficiaries. (2) The term ‘‘working owner’’ as used in this paragraph (d) means any person who a responsible plan fiduciary reasonably determines is an individual: (i) Who has an ownership right of any nature in a trade or business, whether incorporated or unincorporated, including a partner or other selfemployed individual; (ii) Who is earning wages or selfemployment income from the trade or business for providing personal services to the trade or business; and (iii) Who either: (A) Works on average at least 20 hours per week or at least 80 hours per month providing personal services to the working owner’s trade or business, or (B) In the case of a MEP described in paragraph (b) of this section, if applicable, has wages or selfemployment income from such trade or business that at least equals the working PO 00000 Frm 00038 Fmt 4701 Sfmt 9990 owner’s cost of coverage for participation by the working owner and any covered beneficiaries in any group health plan sponsored by the group or association in which the individual is participating or is eligible to participate. (3) The determination under this paragraph (d) must be made when the working owner first becomes eligible for participation in the defined contribution MEP and continued eligibility must be periodically confirmed pursuant to reasonable monitoring procedures. (e) Severability. (1) If any provision of this section is held to be invalid or unenforceable by its terms, or as applied to any person or circumstance, or stayed pending further agency action, the provision shall be construed so as to continue to give the maximum effect to the provision permitted by law, unless such holding shall be one of complete invalidity or unenforceability, in which event the provision shall be severable from this section and shall not affect the remainder thereof. (2) Examples. (i) If any portion of paragraph (b)(1)(i) of this section (containing the substantial business purpose requirement) is found to be void in a manner contemplated by paragraph (e)(1) of this section, then the whole of paragraph (b)(1)(i) of this section shall be construed as follows: ‘‘The group or association must be a viable entity in the absence of offering and providing MEP coverage or other employee benefits to its employer members and their employees.’’ (ii) If any portion of paragraph (d) of this section (containing the ‘‘working owner’’ provision) is found to be void in a manner contemplated by paragraph (e)(1) of this section, such a decision does not impact the ability of a bona fide group or association to meet the ‘‘commonality of interest’’ requirement in paragraph (b)(2) of this section by being located in the same geographic locale. Signed at Washington, DC, on July 22, 2019. Preston Rutledge, Assistant Secretary, Employee Benefits Security Administration, Department of Labor. [FR Doc. 2019–16074 Filed 7–29–19; 8:45 am] BILLING CODE 4510–29–P E:\FR\FM\31JYR3.SGM 31JYR3

Agencies

[Federal Register Volume 84, Number 147 (Wednesday, July 31, 2019)]
[Rules and Regulations]
[Pages 37508-37544]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-16074]



[[Page 37507]]

Vol. 84

Wednesday,

No. 147

July 31, 2019

Part IV





Department of Labor





-----------------------------------------------------------------------





Employee Benefits Security Administration





-----------------------------------------------------------------------





29 CFR Part 2510





Definition of ``Employer'' Under Section 3(5) of ERISA--Association 
Retirement Plans and Other Multiple-Employer Plans and ``Open MEPs'' 
and Other Issues Under Section 3(5) of the Employee Retirement Income 
Security Act; Final Rule and Proposed Rule

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

[[Page 37508]]


-----------------------------------------------------------------------

DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2510

RIN 1210-AB88


Definition of ``Employer'' Under Section 3(5) of ERISA--
Association Retirement Plans and Other Multiple-Employer Plans

AGENCY: Employee Benefits Security Administration, Department of Labor.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: This document contains a final regulation under title I of the 
Employee Retirement Income Security Act (ERISA) that expands access to 
affordable quality retirement saving options by clarifying the 
circumstances under which an employer group or association or a 
professional employer organization (PEO) may sponsor a multiple 
employer workplace retirement plan under title I of ERISA (as opposed 
to providing an arrangement that constitutes multiple separate 
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 ERISA for 
purposes of establishing or maintaining an individual account 
``employee pension benefit plan'' within the meaning of ERISA. As an 
``employer,'' a group or association, as well as a PEO, can sponsor a 
defined contribution retirement plan for its members (collectively 
referred to as ``multiple employer plans'' or ``MEPs'' unless otherwise 
specified). Thus, different businesses may join a MEP, either through a 
group or association or through a PEO. The final regulation also 
permits certain working owners without employees to participate in a 
MEP sponsored by an employer group or association. The final rule 
primarily affects groups or associations of employers, PEOs, plan 
participants, and plan beneficiaries. It does not affect whether 
groups, associations, or PEOs assume joint-employment relationships 
with member-employers or client employers. But it may affect banks, 
insurance companies, securities broker-dealers, record keepers, and 
other commercial enterprises that provide retirement-plan products and 
services to ERISA plans and plan sponsors.

DATES: This final regulation is effective on September 30, 2019.

FOR FURTHER INFORMATION CONTACT: Mara S. Blumenthal or Frances P. 
Steen, Office of Regulations and Interpretations, Employee Benefits 
Security Administration, (202) 693-8500. This is not a toll-free 
number.

SUPPLEMENTARY INFORMATION: 

A. Background

1. Need To Expand Access to Workplace Retirement Plans

    Expanding access to workplace retirement plans is critical to 
helping more American workers financially prepare to retire. 
Approximately 38 million private-sector employees in the United States 
do not have access to a retirement plan through their employers.\1\ 
According to the U.S. Bureau of Labor Statistics, 23 percent of all 
private-sector, full-time workers have no access to a workplace 
retirement plan.\2\ The percentage of private-sector workers without 
access to a workplace retirement plan increases to 32 percent when 
part-time workers are included.\3\
---------------------------------------------------------------------------

    \1\ This number was estimated by the U.S. Department of Labor's 
Employee Benefits Security Administration using statistics from the 
U.S. Bureau of Labor Statistics, National Compensation Survey: 
Employee Benefits in the United States, March 2018 (https://www.bls.gov/ncs/ebs/benefits/2018/employee-benefits-in-the-united-states-march-2018.pdf). According to Table 2 (entitled Retirement 
Benefits: Access, Participation and Take-up rates, Private Industry 
Workers) of this survey, approximately 68% of private-sector 
industry workers have access to retirement benefits through their 
employers in 2018. According to Appendix Table 2, the survey 
represents approximately 118.1 million workers in 2018. Thus, the 
number of private industry workers without access to retirement 
plans through their employers is estimated to be approximately 38 
million ((100%-68%) x 118.1 million).
    \2\ U.S. Bureau of Labor Statistics, National Compensation 
Survey: Employee Benefits in the United States, March 2018 at Table 
2 (entitled Retirement Benefits: Access, Participation and Take-up 
rates, Private Industry Workers). The survey is available at 
(www.bls.gov/ncs/ebs/benefits/2018/employee-benefits-in-the-unitedstates-march-2018.pdf).
    \3\ Id.
---------------------------------------------------------------------------

    Small businesses are less likely to offer retirement benefits. In 
2018, approximately 85 percent of workers at private-sector 
establishments with 100 or more workers were offered a retirement plan. 
In contrast, only 53 percent of workers at private-sector 
establishments with fewer than 100 workers had access to such plans.\4\ 
Contingent or temporary workers are less likely to have access to a 
workplace retirement plan than those who are traditionally employed.\5\ 
Access to an employment-based retirement plan is critical to the 
financial security of aging workers. Among workers who do not have 
access to a workplace retirement plan, only about 13 percent regularly 
contribute to individual retirement accounts, commonly called IRAs.\6\
---------------------------------------------------------------------------

    \4\ Id.
    \5\ See U.S. Bureau of Labor Statistics, Contingent and 
Alternative Employment Arrangements--May 2017. See also Copeland, 
Employee Benefit Research Institute, Employment-Based Retirement 
Plan Participation: Geographic Differences and Trends, 2013, 
(October 2014); U.S. Government Accountability Office, Contingent 
Workforce: Size, Characteristics, Earnings, and Benefits, April 20, 
2015; U.S. Gov't Accountability Office, GAO-15- 566, RETIREMENT 
SECURITY--Federal Action Could Help State Efforts to Expand Private 
Sector Coverage (Sept. 2015) (www.gao.gov/assets/680/672419.pdf)
    \6\ The Department calculated this using Survey of Income and 
Program Participation 2008 Panel Data Waves 10 and 11.
---------------------------------------------------------------------------

    Cost and regulatory complexity discourage employers--especially 
small businesses--from offering workplace retirement plans for their 
employees. Establishing and maintaining a plan can be expensive for 
small businesses. A survey by the Pew Charitable Trusts found that only 
53 percent of small-to mid-sized businesses offer a retirement plan; 37 
percent of those not offering a plan cited cost as a reason.\7\ 
Employers often cite annual reporting costs and exposure to potential 
fiduciary liability as major impediments to plan sponsorship. \8\
---------------------------------------------------------------------------

    \7\ The Pew Charitable Trusts, Employer Barriers to and 
Motivations for Offering Retirement Benefits, (June 2017) (http://www.pewtrusts.org/-/media/assets/2017/09/employerbarrierstoandmotivations.pdf) (``Most commonly, employers 
without plans said that starting a retirement plan is too expensive 
to set up (37 percent). Another 22 percent cited a lack of 
administrative resources. In focus groups, some business 
representatives said their mix of workers--especially if they 
included low-wage or short-term employees--translated into limited 
employee interest in or demand for retirement benefits. But in the 
survey, only 17 percent cited lack of employee interest as the main 
reason they did not offer a plan.'').
    \8\ Two other types of pension arrangements share features of 
MEPs, but are not the focus of this rule. First, a ``multiemployer 
plan'' as defined in ERISA section 3(37) is a plan to which more 
than one employer is required to contribute and which is maintained 
pursuant to one or more collective bargaining agreements between one 
or more employee organizations and more than one employer. Second, 
Pre-Approved Retirement Plans, are plans that providers, such as 
financial institutions, make available for adoption by employers and 
that have been pre-approved by the IRS. See Rev. Proc. 2017-41, 
2017-29 IRB 92. A plan that uses a Pre-Approved Plan document may 
either be a single-employer plan or a MEP. With respect to single-
employer Pre-Approved Plans, providers often offer centralized 
administration services and pool the assets of different plans into 
a central investment fund, such as an IRS Rev. Rul. 81-100 group 
trust.
---------------------------------------------------------------------------

    Although there are ways to save for retirement outside of the 
workplace, none are as advantageous to workers as employment-based 
plans. IRAs, for example, are not comparable to workplace retirement 
savings options. As compared to IRAs, ERISA-covered retirement plans 
offer private sector workers: (1) Higher contribution limits; (2) 
generally lower investment

[[Page 37509]]

management fees as the size of plan assets increases; (3) a well-
established uniform regulatory structure with important consumer 
protections, including fiduciary obligations, recordkeeping and 
disclosure requirements, legal accountability provisions, and spousal 
protections; (4) automatic enrollment; and (5) stronger protections 
from creditors. At the same time, workplace retirement plans enhance 
employers' ability to choose among a wide variety of plan features and 
the flexibility to tailor retirement plans to meet their business and 
employment needs.
    Although many MEPs already exist, past sub-regulatory guidance 
issued by the Department and uncertainty about the ability of PEOs and 
associations to sponsor MEPs as ``employers'' may have hindered the 
creation of MEPs. As the Department also learned through its 
``association health plan'' rulemaking process (AHP Rule), described in 
section 3 of this preamble, many employer groups and associations are 
interested in offering employee benefits to their members, but view the 
Department's prior interpretive guidance as too restrictive, creating 
an undue impediment to greater sponsorship of retirement plans. 
Likewise, we understand that an active PEO industry already exists \9\ 
and that its members, much like employer groups and associations, offer 
or would like to offer MEPs to their clients. At least some PEOs may be 
discouraged from doing so by a lack of clear standards, to the 
detriment of employers, especially small employers.
---------------------------------------------------------------------------

    \9\ The IRS has already recognized that a PEO may offer a MEP 
for its clients under the Code. See IRS Rev. Proc. 2002-21 
(describing steps that may be taken to ensure the qualified status 
of defined contribution multiple employer plans maintained by PEOs).
---------------------------------------------------------------------------

2. Legislative Activity

    In recent years, members of Congress have also sought to promote 
MEPs through legislation, including recent legislative proposals that 
address so-called ``open MEPs,'' which are plans that cover employees 
of employers with no relationship other than their joint participation 
in the MEP. Since the publication of the proposal and the beginning of 
the 116th Congress, seven bills dealing with this topic have been 
introduced, including H.R. 1994, the ``Setting Every Community Up for 
Retirement and Enhancement Act of 2019,'' commonly known as the 
``SECURE Act,'' which was passed overwhelmingly by the House of 
Representatives on May 23, 2019 by a vote of 417-3.\10\ The SECURE Act, 
in relevant part, makes comprehensive changes to ERISA and the Code to 
facilitate open MEPs. The final rule differs in significant ways from 
the legislative proposals introduced in Congress. In particular, this 
rule is significantly more limited in scope because it relies solely on 
the Department's authority to promulgate regulations administering 
title I of ERISA. Unlike the Department, Congress has authority to make 
statutory changes to ERISA and other areas of law that govern 
retirement savings, such as the Code.
---------------------------------------------------------------------------

    \10\ The SECURE Act had originally been introduced on March 22, 
2019 on a bipartisan basis by House Ways and Means Chairman Richard 
Neal (D-MA), Ranking Member Kevin Brady (R-TX), Rep. Mike Kelly (R-
PA) and Rep. Ron Kind (D-WI). The SECURE Act contains the MEP 
provisions found in S. 972/H.R. 1007, the ``Retirement and 
Enhancement Savings Act of 2019'' or ``RESA,'' introduced by Senate 
Finance Committee Chair Charles Grassley (R-IA) and Ranking Member 
Sen. Ron Wyden (D-OR) on April 1, 2019 and Rep. Ron Kind (D-WI) and 
38 cosponsors on February 6, 2019, respectively, and H.R. 1084, the 
``Family Savings Act,'' introduced in February 7, 2019 by Rep. Mike 
Kelly (R-PA) and 9 cosponsors. The other three MEP bills introduced 
in the 116th Congress are H.R. 198, the ``Retirement Security for 
American Workers Act,'' introduced by Reps. Vern Buchanan (R-FL) and 
Ron Kind (D-WI) on March 27, 2019; S. 1101, the ``Small Business 
Employees Retirement Enhancement Act, introduced by Sens. Tom Cotton 
(R-AR), Todd Young (R-IN), and Doug Jones (D-AL) on April 3, 2019; 
and S. 321, the ``Retirement Security Act of 2019, introduced by 
Sens. Susan Collins (R-ME) and Maggie Hassan (D-NH) on February 4, 
2019. In the 115th Congress, there were eight bills introduced 
containing MEP provisions.
---------------------------------------------------------------------------

3. Association Health Plan Rule

    As mentioned above, the Department recently promulgated a similar 
rule to expand access to more affordable, quality healthcare by 
enhancing the ability of employers to band together to provide health 
benefits through a single ERISA-covered plan, called an ``association 
health plan.'' That regulation, the AHP Rule, issued on June 21, 2018, 
explains how employers acting together to provide such health benefits 
may meet the definition of the term ``employer'' in ERISA section 
3(5).\11\ The AHP Rule sets forth several criteria under which groups 
or associations of employers may establish an ERISA-covered multiple 
employer group health plan. Several commenters on the AHP proposed rule 
encouraged the Department to bring MEPs within the scope of that rule 
or a new rule. In the AHP Rule, the Department said it would consider 
those comments in the retirement plan context.\12\
---------------------------------------------------------------------------

    \11\ 83 FR 28912 (June 21, 2018). In State of New York v. United 
States Department of Labor, 363 F. Supp. 3d 109 (D.D.C. March 28, 
2019), the District Court vacated portions of the Department's final 
rule on AHPs. The Department disagrees with the District Court's 
ruling and an appeal has been filed.
    \12\ Id. at 28964, n.10.
---------------------------------------------------------------------------

4. Executive Order 13847

    On August 31, 2018, President Trump issued Executive Order 13847, 
``Strengthening Retirement Security in America,'' (Executive Order), 
which states that ``[i]t shall be the policy of the Federal Government 
to expand access to workplace retirement plans for American workers.'' 
The Executive Order directed the Secretary of Labor to examine policies 
that would: (1) Clarify and expand the circumstances under which U.S. 
employers, especially small and mid-sized businesses, may sponsor or 
adopt a MEP as a workplace retirement savings 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 nontraditional employer-
employee relationships by expanding their access to workplace 
retirement savings plans, including MEPs. The Executive Order further 
directed, to the extent consistent with applicable law and the policy 
of the Executive Order, that the Department consider within 180 days of 
the date of the Executive Order whether to issue a notice of proposed 
rulemaking, other guidance, or both, that would clarify when a group or 
association of employers or other appropriate business or organization 
could be an ``employer'' within the meaning of ERISA section 3(5).
    The Department has authority to interpret the statutes it 
administers, and it believes that it is appropriate to clarify how the 
statutory definition of ``employer,'' 29 U.S.C. 1002(5), should apply 
to certain MEPs under title I of ERISA. For several reasons, the 
Department has chosen to retain nearly the same criteria for these MEPs 
that it proposed. The Department is not opining, however, on whether 
other types of MEPs with different or less-stringent criteria, or 
different ``employers,'' may also qualify under title I. The Department 
had previously issued subregulatory guidance interpreting this section 
3(5) of ERISA that took a narrow view of the circumstances under which 
a group or association of employers could band together to act ``in the 
interest of'' employer members in relation to the offering of 
retirement savings plans. By clarifying its interpretation of the 
statutory language, the Department expects to improve access to 
employer-

[[Page 37510]]

sponsored retirement savings plans in America.
    The Department, therefore, is publishing this final rule 
interpreting the term ``employer'' for purposes of ERISA section 3(5). 
This rule facilitates the adoption and administration of MEPs and 
thereby expands access to workplace retirement plans, especially for 
employees of small and mid-size employers and for certain self-employed 
individuals. This final rule supersedes any preexisting subregulatory 
interpretive rulings under ERISA section 3(5) pertaining to bona fide 
groups or associations of employers and, at the same time, establishes 
more flexible standards and criteria for sponsorship of MEPs than 
currently articulated in that prior guidance. The final rule does not 
affect existing auto-enrollment options and other features that make 
defined contribution plans attractive for employers. The final rule 
also has no superseding effect on Interpretive Bulletin 2015-02, as 
further explained below in the ``Miscellaneous'' section of this 
preamble.

5. Notice of Proposed Rulemaking

    On October 23, 2018, the Department published a proposed regulation 
(``Proposed Rule'') to clarify certain circumstances under which an 
employer group or association or a PEO may sponsor a MEP. More 
specifically, the Proposed Rule clarified that employer groups or 
associations and PEOs can, when satisfying certain criteria, constitute 
``employers'' within the meaning of section 3(5) of ERISA for purposes 
of establishing or maintaining an ``employee pension benefit plan'' 
within the meaning of ERISA section 3(2). Under the terms of the 
Proposed Rule, a group or association, as well as a PEO, could sponsor 
a MEP as an ``employer.'' The Proposed Rule permitted different 
businesses to join a MEP, either through a group or association or 
through a PEO. The Proposed Rule also permitted certain working owners 
without employees to participate in a MEP sponsored by a group or 
association.
    The Proposed Rule identified the potential advantages of scale 
offered by MEPs. MEPs have the potential to broaden the availability of 
workplace retirement plans, especially among small employers, because 
they enable different businesses to band together and adopt a single 
retirement plan. Pooling resources in this way can reduce costs and 
encourage plan formation. For example, investment companies often 
charge lower fund fees for plans with greater asset accumulations. And 
because MEPs facilitate the pooling of plan participants and assets in 
one large plan, rather than many small plans, they enable small 
businesses to give their employees access to the same low-cost funds as 
large employers offer.
    The Proposed Rule also identified other potential advantages of 
MEPs. For a small business, in particular, a MEP may present an 
attractive alternative to taking on the responsibilities of sponsoring 
or administering its own plan. The MEP structure can reduce the 
employer's cost of sponsoring a benefit plan and effectively transfer 
substantial legal risk to professional fiduciaries responsible for the 
management of the plan. Although employers retain fiduciary 
responsibility for choosing and monitoring the arrangement and 
forwarding required contributions to the MEP, the employer can keep 
more of its day-to-day focus on managing its business, rather than the 
MEP.
    Under the Proposed Rule, participating employers were generally 
required to execute a participation agreement or similar instrument 
that lays out the rights and obligations of the MEP sponsor and the 
participating employer before participating. But these participating 
employers were not viewed as sponsoring their own separate, individual 
plans under ERISA. Rather, the MEP, if it met the conditions of the 
Proposed Rule, constituted a single employee benefit plan for purposes 
of title I of ERISA. Consequently, the MEP sponsor--and not the 
individual participating employers--generally was responsible, as plan 
administrator, for compliance with the requirements of title I of 
ERISA, including reporting, disclosure, and fiduciary obligations. This 
is so because the individual employers would not each have had to act 
as plan administrators under ERISA section 3(16) or as named 
fiduciaries under section 402 of ERISA.
    The Proposed Rule provided that an employer group or association or 
PEO could act as the ``employer'' sponsoring the plan within the 
meaning of section 3(5) of ERISA. This means that, typically, the 
employer group or association or PEO would act as a plan administrator 
and named fiduciary and, thus, would assume most fiduciary 
responsibilities. A MEP under the Proposed Rule is subject to all of 
the ERISA provisions applicable to defined contribution retirement 
plans, including the fiduciary responsibility and prohibited 
transaction provisions in title I of ERISA. As a plan that is 
maintained by more than one employer, a MEP also has to satisfy the 
requirements of section 210(a) of ERISA.

6. Legal Background

a. Statutory Definitions
    ERISA section 4 governs the reach of ERISA and, accordingly, of the 
Department's authority over benefit plans. ERISA applies not to every 
benefit plan but, as relevant here, to an ``employee benefit plan'' 
sponsored ``by any employer.'' ERISA section 4(a)(1); 29 U.S.C. 
1003(a)(1).\13\ The provision reads in relevant part: ERISA ``shall 
apply to any employee benefit plan if it is established or maintained 
by any employer engaged in commerce or in any industry or activity 
affecting commerce . . . .'' ERISA defines ``employee pension benefit 
plan'' to include ``any plan, fund, or program . . . established or 
maintained by an employer . . . to the extent that by its express terms 
or as a result of surrounding circumstances'' it provides retirement 
income to employees or the deferral of income to the termination of 
employment or beyond. Thus, the term ``employer'' is essential to a 
benefit arrangement's status as an ``employee pension benefit plan'' 
within the meaning of ERISA. A prerequisite for ERISA coverage is that 
the retirement plan must be established or maintained by an 
``employer.''
---------------------------------------------------------------------------

    \13\ ERISA also covers benefit plans established or maintained 
by employee organizations and such plans established or maintained 
by both employers and employee organizations.
---------------------------------------------------------------------------

    ERISA section 3(5) defines the term ``employer.'' ERISA section 
3(5); 29 U.S.C. 1002(5). ERISA's definitional provision, in relevant 
part, 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.'' 
When Congress enacted ERISA in 1974, it carried forward this important 
definition from the 1958 Welfare and Pension Plans Disclosure Act. 
Public Law 85-836, section 3(a)(4), 72 Stat. 997, 998 (1958).
    But ERISA does not explain what it means for an entity to act 
``directly as an employer'' or ``indirectly in the interest of an 
employer, in relation to an employee benefit plan.'' Nor does the 
statute explain what is meant by a ``group or association of 
employers.'' In short, these ambiguous statutory terms are not 
themselves defined. As one court has recognized, the ``problem lies, 
obviously enough, in determining what is meant by these oblique 
definitions of employer.'' Meredith v. Time Ins. Co., 980 F.2d 352, 356 
(5th Cir. 1993). The statutory lacunae have proven

[[Page 37511]]

problematic for some courts. They ``have found the phrase `act . . . 
indirectly in the interest of an employer' difficult to interpret.'' 
See Mass. Laborers' Health & Welfare Fund v. Starrett Paving Corp., 845 
F.2d 23, 24 (1st Cir. 1988); accord Greenblatt v. Delta Plumbing & 
Heating Corp., 68 F.3d 561, 575 (2d Cir. 1995) (collecting cases). Also 
ambiguous is the statutory term ``group or association of employers.'' 
Because ERISA ``does not define th[at] term,'' this ``void injects 
ambiguity into the statute.'' MD Physicians & Assocs. v. State Bd. of 
Ind., 957 F.2d 178, 184 (5th Cir. 1992). Although ERISA contains a 
definition of ``employer,'' the important terms used within that 
definition are unexplained.
    In light of all this, and consistent with longstanding principles 
of administrative law, the Department is well-positioned to address 
this statutory ambiguity by exercising its rulemaking authority, see 29 
U.S.C. 1135, to explicate some of the terms used in section 3(5). In 
doing so, the Department is aided both by the common understanding of 
the broad terms used in ERISA section 3(5) and by the statutory 
context.
b. Bona Fide Groups or Associations
    The Department has long taken the position in subregulatory 
guidance that, even in the absence of the involvement of an employee 
organization, a single ``multiple employer plan'' under ERISA may exist 
where a cognizable group or association of employers, acting in the 
interest of its employer members, establishes a benefit program for the 
employees of member employers. To satisfy these criteria, the group or 
association must exercise control over the amendment process, plan 
termination, and other similar functions of the plan on behalf of the 
participating-employer members with respect to the plan and any trust 
established under the program.\14\ DOL guidance generally refers to 
these entities--i.e., entities that qualify as groups or associations, 
within the meaning of section 3(5)--as ``bona fide'' employer groups or 
associations.\15\ For each employer that adopts for its employees a 
program of pension or welfare benefits sponsored by an employer group 
or association that is not ``bona fide,'' such employer establishes its 
own separate employee benefit plan covered by ERISA.\16\ Largely, but 
not exclusively, in the context of welfare-benefit plans, the 
Department has previously distinguished employer groups or associations 
that can act as ERISA section 3(5) employers in sponsoring multiple 
employer plans from those that cannot. To do so, the Department has 
asked whether the group or association has a sufficiently close 
economic or representational nexus to the employers and employees that 
participate in the plan that is unrelated to the provision of 
benefits.\17\
---------------------------------------------------------------------------

    \14\ See 83 FR at 28912, 28920.
    \15\ See, e.g., Advisory Opinions 2008-07A, 2003-17A, and 2001-
04A.
    \16\ See 83 FR 28912, 13 (citing Advisory Opinion 96-25A).
    \17\  See 83 FR 28912; see also Advisory Opinions 2012-04A, 
1983-21A, 1983-15A, and 1981-44A.
---------------------------------------------------------------------------

    DOL advisory opinions and court decisions have long applied a 
facts-and-circumstances approach to determine whether there is a 
sufficient common economic or representational interest or genuine 
organizational relationship for there to be a bona fide employer group 
or association capable of sponsoring an ERISA plan on behalf of its 
employer members. This analysis has focused on three broad sets of 
issues, in particular: (1) Whether the group or association is a bona 
fide organization with business/organizational purposes and functions 
unrelated to the provision of benefits; (2) whether the employers share 
some commonality and genuine organizational relationship unrelated to 
the provision of benefits; and (3) whether the employers that 
participate in a plan, either directly or indirectly, exercise control 
over the plan, both in form and substance. This approach has ensured 
that the Department's regulation of employee benefit plans is focused 
on employment-based arrangements, as contemplated by ERISA's text.
c. Professional Employer Organizations
    According to the IRS, the term ``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.'' \18\ 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. Under the 
terms of a typical PEO client contract, the PEO assumes responsibility 
for paying the employees and for related employment tax compliance, and 
has attendant contractual responsibilities and obligations, without 
regard to payment from the client employer to the PEO. A PEO also may 
manage human resources, employee benefits, workers-compensation claims, 
and unemployment-insurance claims for the client employer. The client 
employer typically pays the PEO a fee based on payroll costs plus an 
additional amount.\19\ According to a representative of the PEO 
industry, the PEO assumes specific employer rights, responsibilities, 
and risks through the establishment and maintenance of a relationship 
with the workers of the client, including in some cases to reserve a 
right of direction and control of the employees with respect to 
particular matters.
---------------------------------------------------------------------------

    \18\ Certified Professional Employer Organizations, 81 FR 27315 
(May 6, 2016).
    \19\ Foster, Michael D., Certified Professional Employer 
Organizations (July 7, 2016) https://www.jacksonkelly.com/tax-monitor-blog/certified-professional-employer-organizations.
---------------------------------------------------------------------------

(i) Current Primary Legal Authority
    Although many PEOs administer plans for their client employers 
today, there is little direct authority on precisely what it means for 
a PEO or other entity to act ``indirectly in the interest'' of its 
client employers in relation to an employee benefit plan for purposes 
of ERISA section 3(5). Whether a PEO is an ``employer'' under section 
3(5) depends on the ``indirectly in the interest of an employer'' 
provision, not the ``employer group or association'' provision. And 
neither existing subregulatory guidance nor judicial authority has 
articulated a specific test to determine when a PEO is sufficiently 
tied to its client-employer to be said to be acting ``indirectly in the 
interest of an employer, in relation to an employee benefit plan,'' 
within the meaning of section 3(5).\20\ The different statutory text 
and the differences in the nature of the employer relationships merit a 
different regulatory approach to PEOs than to employer groups or 
associations.
---------------------------------------------------------------------------

    \20\ The lack of a specific and clear test leads to different 
outcomes. Compare Yearous v. Pacificare of California, 554 F. Supp. 
2d 1132 (S.D. Cal. 2007) (applying factors in Nationwide Mut. Ins. 
Co. v Darden, 503 U.S. 318 (1992), court concluded that PEO is 
direct employer of owner of company for purposes of sponsoring an 
ERISA covered healthcare plan covering the owner and his 
beneficiaries) with Texas v. Alliance Employee Leasing Co., 797 F. 
Supp. 542 (N.D. Tex. 1992) (finding leasing company did not act 
directly or indirectly as employer under ERISA).
---------------------------------------------------------------------------

(ii) Current Secondary Legal Authority
    Some federal statutes treat a PEO as an ``employer'' for certain 
limited purposes in other circumstances. For instance, regulations 
issued pursuant to the Family and Medical Leave Act of 1993 (FMLA) 
specifically recognize that a PEO may, under certain circumstances, 
enter into a relationship

[[Page 37512]]

with the employees of its client companies such that it is considered a 
``joint employer'' for purposes of determining FMLA coverage and 
eligibility, enforcing the FMLA's anti-retaliation provisions, and in 
limited situations, providing job restoration.\21\ In the main, 
however, the FMLA regulations clarify that a ``PEO does not enter into 
a joint employment relationship with the employees of its client 
companies when it merely performs . . . administrative functions,'' 
such as ``payroll benefits, regulatory paperwork, and updating 
employment policies.'' 29 CFR 825.106(b)(2). The regulation makes clear 
that PEOs do not become joint employers simply by virtue of providing 
such services to client-employers.
---------------------------------------------------------------------------

    \21\ 29 CFR 825.106(b)(2), (e).
---------------------------------------------------------------------------

    Furthermore, the Tax Increase Prevention Act of 2014, Public Law 
113-295 (Dec. 19, 2014) required the IRS to establish a voluntary 
certification program for such PEOs (CPEO Program) as discussed in more 
detail below. The CPEO Program certifies PEOs that meet certain 
requirements within the Code and provides a level of assurance to 
small-business owners that rely on such a Certified Professional 
Employer Organization (CPEO) to handle their employment-tax issues. 
CPEOs are treated as employers under the Code for employment tax 
purposes with regard to remuneration paid to their customers' employees 
under CPEO service contracts. Pursuant to its certification as a CPEO, 
a CPEO is solely liable for the employment tax withholding, payment, 
and reporting obligations with respect to remuneration it pays to work 
site employees (as defined in IRC 7705(e)).'' \22\
---------------------------------------------------------------------------

    \22\ See IRC section 3511(a)(1).
---------------------------------------------------------------------------

B. Overview of the Final Rule and Discussion of Public Comments

1. In General

    The Department believes that providing additional opportunities for 
employers to join MEPs as a way to offer workplace retirement savings 
plans to their employees could, under the conditions in the final rule, 
offer many small businesses more affordable and less burdensome 
retirement savings plan alternatives than are currently available. MEPs 
provide another avenue for those employers that are reluctant to 
shoulder such burdens. In addition, the final rule will level the 
playing field for small-business employees by permitting them to have 
access to the lowest-cost funds, often reserved for employees in large-
asset plans. Accordingly, the Department is confident that the final 
rule will prompt some small businesses that do not currently offer 
workplace retirement benefits to offer such benefits. This will 
increase the number of employees enrolled in workplace retirement 
plans, thereby offering some of America's workers better retirement 
savings opportunities and greater retirement security.
    Paragraph (a) defines the scope of the final rule. This paragraph 
provides that bona fide employer groups or associations and bona fide 
PEOs may act as ``employer[s]'' under ERISA section 3(5) for purposes 
of sponsoring a MEP. This interpretation is based upon the Department's 
conclusion that such bona fide employer groups, associations, or PEOs 
can act ``in the interest of '' their employer members in relation to a 
retirement savings plan.
    Although the term ``multiple employer plan'' can refer to a variety 
of different kinds of employee-benefit arrangements, this final rule 
addresses only two kinds of arrangements: Sponsorship of a MEP by 
either a group or association of employers, or by a PEO. The final rule 
is also limited to defined contribution plans, as defined in section 
3(34) of ERISA. The final rule does not cover welfare benefit plans or 
other types of pension plans.
    Some commenters recommended expanding the scope of the Proposed 
Rule so that the final rule would cover other employee benefit plans. 
These commenters mentioned life, disability, and defined benefit 
pension plans in particular. At the same time, however, other 
commenters recommended that this rulemaking project remain limited to 
defined contribution plans. These commenters stated that different 
issues might arise under different employee benefit plan structures and 
different benefit options. These commenters preferred that the 
Department continue a discussion with interested parties on whether and 
how to implement a future regulatory expansion to cover these other 
employee benefit plans. After thoughtful review of these comments, 
however, the final rule is limited to defined contribution plans 
because the Department believes that consideration and development of 
any proposal covering other types of pension and welfare benefit plans 
or other persons or organizations as plan sponsors would benefit from 
public comments and additional consideration by the Department.

2. Open MEPs and Request for Information

    The Proposed Rule solicited comments on so-called ``open MEPs'' or 
``pooled employer plans,'' which generally are defined contribution 
retirement 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 in this or a future 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.
    Nearly half of the comments received addressed this issue, and the 
majority were supportive of the Department promulgating a rule that 
would facilitate these arrangements. Nonetheless, commenters had 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 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. A 
number of commenters believed commercial entities and financial 
services firms should be precluded from

[[Page 37513]]

sponsoring MEPs as an ``employer'' under section 3(5) of ERISA. A few 
commenters viewed the matter as being better suited for legislation, 
given the wide range of issues presented under ERISA and the Code.
    After reviewing the comments, the Department is persuaded that open 
MEPs deserve further consideration. The Department, however, does not 
believe that it has acquired a sufficient public record on, or a 
sufficiently thorough understanding of, the complete range of issues 
presented by the topic. In light of 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 solicit comments on a 
broad range of issues relating to open MEPs in a Request for 
Information (RFI) published elsewhere today in the Federal Register for 
possible future rulemaking and to defer rulemaking on open MEPs until 
after a fuller public record is developed. Because of its interest, 
however, in expanding opportunities for small businesses and working 
owners to participate in MEPs as soon as possible, the Department is 
publishing this final rule today, which is limited to bona fide groups 
or associations and bona fide PEOs that may act as employers that 
establish and maintain MEPs.

3. Bona Fide Groups or Associations of Employers

    Paragraph (b) of the final rule contains the provisions defining 
what is a bona fide group or association of employers capable of 
establishing a MEP. \23\ These provisions replace and supersede 
criteria in prior subregulatory guidance dealing with retirement plans 
and bona fide groups or associations of employers. The criteria in 
paragraph (b) distinguish bona fide group or association MEPs from 
retirement products and services offered by purely commercial pension 
administrators, managers, and record keepers. In a broad colloquial 
sense, it is possible to say that commercial service providers, such as 
banks, trust companies, insurance companies, and brokers, act 
``indirectly in the interest of'' their customers, but that does not 
convert every service provider into an ERISA-covered ``employer'' of 
their customer's employees. ERISA section 3(5) and ERISA title I's 
overall structure contemplate employment-based benefit 
arrangements.\24\ The Department's authority to define ``employer'' and 
``group or association of employers'' under ERISA section 3(5) does not 
broadly extend to arrangements established to provide benefits outside 
the employment context and without regard to the members' status as 
employers.\25\ Thus, the criteria in paragraph (b) identify certain 
groups and associations that act as employers within the meaning of 
ERISA section 3(5), and distinguish those groups and associations from 
others that may not act as an ``employer.''
---------------------------------------------------------------------------

    \23\ The term ``bona fide'' in the proposal refers to a group, 
association, or PEO that meets the conditions of the proposed 
regulation and, therefore, is able to be an ``employer'' for 
purposes of section 3(5) of ERISA. No inferences should be drawn 
from the use of this term regarding the actual bona fides of the 
group, association or organization outside of this context.
    \24\ The Department took the same position in the AHP Rule. 83 
FR 28912, 28913 (June 21, 2018).
    \25\ Id. at 28916.
---------------------------------------------------------------------------

    The provisions in paragraph (b) generally mirror those in the final 
AHP Rule that define what is a bona fide group or association capable 
of establishing an association health plan.\26\ These provisions have 
the same meaning and effect here, as they have there. It makes sense to 
have consistent provisions for AHPs and MEPs, because the Department is 
interpreting the same definitional provisions in both contexts and 
because many of the same types of groups or associations of employers 
that sponsor AHPs for their members will also want to sponsor MEPs. 
Accordingly, and for the sake of regulatory uniformity and simplicity, 
if a group or association of employers can establish a bona fide AHP 
under the AHP Rule, the group or association should also be able to 
establish a MEP under this final rule.
---------------------------------------------------------------------------

    \26\ The final rule does not contain provisions analogous to the 
healthcare nondiscrimination provisions of the AHP Rule because 
defined contribution retirement plans do not underwrite health risk 
and are not susceptible to the rating and segmentation pressures 
that characterize the healthcare marketplaces. Some defined 
contribution plans may offer lifetime income features, such as 
immediate or deferred annuities, which potentially implicate some 
degree of longevity risk. The Department, however, does not believe 
the potential presence of longevity risk in ancillary features of 
defined contribution MEPs warrants nondiscrimination provisions 
analogous to those of the AHP Rule. The Department also believes, 
and a few commenters expressly agreed with the Department, that any 
relevant nondiscrimination concerns are already addressed in the 
tax-qualification provisions of the Code or other federal laws.
---------------------------------------------------------------------------

    Although commenters suggested changes to the provisions in 
paragraph (b) of the Proposed Rule, the final rule adopts the 
provisions essentially as proposed. In many instances, the rationale 
for declining a particular suggested change or amendment is the same or 
substantially similar to the reason the Department declined the same 
proposed provision in connection with the AHP Rule. After thoughtful 
consideration, the Department has generally determined that the 
rationale for declining a particular suggested change or amendment in 
the AHP context is applicable in the MEP context, unless otherwise 
specified. Accordingly, the major comments on the proposal and 
provisions of the final rule are discussed below.\27\
---------------------------------------------------------------------------

    \27\ Many commenters who support open MEPs made recommendations 
to substantially modify or eliminate some or all of the provisions 
in paragraph (b) of the final rule as a way of achieving an open MEP 
framework. Those comments are addressed in the aggregate above in 
section B 2 of this preamble, and in the related RFI published 
elsewhere in today's Federal Register. They are not addressed in 
this section of the preamble.
---------------------------------------------------------------------------

a. Purpose of the Association
    Paragraph (b)(1)(i) of the Proposed Rule required that a group or 
association of employers have at least one substantial business purpose 
unrelated to offering and providing MEP coverage or other employee 
benefits to its employer members and their employees, even if the 
primary purpose of the group or association is to offer such coverage 
to its members. This provision helps ensure that the association is a 
bona fide association of employers, rather than merely a commercial 
arrangement or entity marketing retirement benefits and services to 
customers on a commercial basis. The ``primary purpose'' provision 
recognizes that it is perfectly legitimate for associations to form, in 
part, as a means of achieving the sorts of economies of scale, 
bargaining power, and administrative expertise that enable them to 
provide valuable benefits to their members, as long as they also serve 
another unrelated substantial business purpose. As an additional 
guidepost, the paragraph specifically provides that the ``substantial 
business purpose'' test is satisfied if the group or association would 
be a viable entity, even in the absence of sponsoring an employee 
benefit plan.
    A number of commenters believe this standard is too lenient. One 
commenter, who believes this standard may be abused by profit seeking 
enterprises, recommended a stricter standard providing that the primary 
purpose of the group or association could not be offering or providing 
retirement benefits. Other commenters with similar concerns recommended 
that the final regulation limit eligible groups or associations of 
employers to groups or associations that are not-for-profit 
organizations. One individual believes the standard is undefined, lacks 
meaningful limitations, and is perfunctory, and that it would allow an

[[Page 37514]]

association to exist for the sole purpose of plan sponsorship.
    It remains the Department's view, however, that requiring a 
substantial business purpose unrelated to offering employee benefits 
strikes an appropriate balance. It appropriately separates out the 
sorts of bona fide associations of employers that Congress intended to 
cover from solely commercial operations; promotes expanded access to 
MEPs; and minimizes the danger of abuse. The ``substantial purpose'' 
test is not a lenient standard, as reflected by the safe harbor for 
associations that would be viable even if they did not provide employee 
benefits. Thus, an entity that exists solely to sponsor a MEP would 
never qualify under the safe harbor. The importance of this safeguard 
should not be underestimated. In the Department's experience under 
ERISA, many (if not most) regulated entities opt to meet the 
requirements of safe harbor provisions, even if more stringent than 
other legally defensible approaches, in exchange for the legal 
certainty that comes from safe harbor compliance.
    More importantly, the commenters overlooked the important 
modifier--``substantial''--in the phrase ``substantial business 
purpose.'' For an organization's business purpose other than offering 
employee benefits to be ``substantial,'' it must be of considerable 
importance to the group or association.\28\ Perfunctory or 
insubstantial purposes are clearly insufficient to meet the test. The 
viability safe harbor provides an indication of just how substantial 
the other purpose must be to meet the rule's terms.
---------------------------------------------------------------------------

    \28\ Compare, substantial, Oxford Dictionary (2019), https://en.oxforddictionaries.com (last visited Apr. 24, 2019) (of 
considerable importance) with, substantial, Merriam-Webster (2019) 
https://www.merriam-webster.com (last visited Apr. 24, 2019) 
(consisting of or relating to substance).
---------------------------------------------------------------------------

    The Department recognizes, however, that it may not always be easy 
to determine if an association would be viable if it did not offer 
employee benefits; that associations may serve multiple other purposes; 
and that the extent to which other purposes support the organization's 
viability may vary from year to year based on all sorts of internal and 
external factors. Accordingly, a purpose other than MEP sponsorship 
does not have to be the lifeline of the organization in order to be 
``substantial.'' It must, however, be of considerable importance to the 
existence of the organization--not merely ``important,'' but of 
``considerable'' importance. The Department expects that, in practice, 
organizations may have numerous other purposes depending on the type 
and size of the organization.
    Ultimately what is ``substantial'' or ``of considerable 
importance'' to a group or association of employers depends on the 
facts and circumstances of the particular situation, taking into 
account the particular organization and its stated mission as reflected 
in its formal organizational structure and by-laws. But in each 
instance, the ``other'' business purpose(s) or activity must be 
substantial enough that the association could, under different 
circumstances, be a viable entity even in the absence of sponsoring a 
MEP. This is true even if the viability of the association as currently 
structured depends on offering and providing MEP coverage to its 
members. For example, if the group or association operated with an 
active membership before sponsoring a MEP, that would be compelling 
evidence of such a substantial business purpose, even if its primary 
purpose in the future becomes offering and providing MEP coverage to 
its members. The organization's earlier operations demonstrate that the 
association could be viable in the absence of offering and providing 
MEP coverage, assuming the organization continues its pre-MEP 
activities.
    Importantly, the final rule includes conditions which, when 
combined with the ``substantial business purpose'' standard, will 
protect participants and beneficiaries from the concerns identified by 
the commenters. These other conditions include the requirement that the 
functions and activities of the group or association must be controlled 
by its employer members. For all of the foregoing reasons, paragraph 
(b)(1)(i) of the Proposed Rule is adopted without change.
    Commenters indicated that it may be a common practice for such 
groups or associations to form wholly owned non-profit corporations for 
the sole purpose of establishing and maintaining benefit programs for 
their members. In these circumstances, the group or association has a 
mechanism to appoint the board of directors of the affiliated 
corporation from among members of the group or association, according 
to the commenters. Commenters requested clarification as to whether the 
substantial business purpose test precludes a group or association of 
employers from using a wholly owned affiliate to administer a MEP in 
this manner. They also pointed out that there are prudent business 
reasons for adopting this type of delivery structure, including that 
the affiliated corporation can focus exclusively on administering 
retirement benefits and catering to the specialized needs of plan 
participants and retirees, while the group or association focuses on 
promoting and advancing the related, but different business purposes of 
the group or association. It is not inconsistent with the substantial 
business purpose test, in the Department's view, if a group or 
association with a substantial business purpose unrelated to offering 
and providing MEP coverage or other employee benefits were to create a 
wholly owned subsidiary to administer a MEP, even if the subsidiary 
exists solely to administer the MEP. In this circumstance, the group or 
association's substantial business purpose unrelated to the provision 
of employee benefits is not affected by its decision to create a 
subsidiary under its control to administer the MEP. This analysis also 
assumes that the other requirements of the final rule are satisfied, 
including the requirement that the group's or association's employer 
members that participate in the plan control the plan, both in form and 
substance.
b. Groups or Associations of Individuals
    Paragraph (b)(1)(ii) of the Proposed Rule required that each 
employer member of the group or association participating in the plan 
be a person acting directly as an employer of at least one employee who 
is a participant covered under the plan. At least two commenters 
requested that the final regulation be expanded to cover groups or 
associations whose members include, not just employers and working 
owners, but also individuals who are not working owners and whose 
employers do not participate in the group or association. These 
commenters assert that membership in associations often includes 
individuals who are common law employees of employers that are not also 
members of the association. These associations desire to permit these 
individuals to enroll in the MEP, according to the commenters. The 
commenters argued that otherwise, the Proposed Rule unduly limits the 
ability of these associations to offer MEPs to all of their members, 
including small employers, independent contractors, and sole 
proprietors who could otherwise benefit from the final rule's extended 
coverage of ``working owners.'' Regardless of the policy merits of 
these arguments, the Department's authority to define ``employer'' and 
``group or association of employers'' under ERISA section 3(5) does not 
broadly extend to arrangements established to provide benefits outside 
the employment context and without regard to the members' status as

[[Page 37515]]

employers. Thus, the final rule, like ERISA section 3(5), is limited to 
employers, including working owners, because the Department cannot 
expand its definition beyond the statute's scope. Accordingly, 
paragraph (b)(1)(ii) of the Proposed Rule is adopted in the final rule 
without change.
c. Formal Organizational Structure
    Paragraph (b)(1)(iii) of the Proposed Rule required a group or 
association to have ``a formal organizational structure with a 
governing body'' as well as ``by-laws or other similar indications of 
formality'' appropriate for the legal form in which the group or 
association operates in order to qualify as a bona fide group or 
association. The Department received no comment letters on this 
provision. Commenters on the mirror provision in the AHP Rule generally 
supported these provisions on the basis that having such formalities 
will not only serve to clarify the rights and obligations of members of 
the group or association, but to promote accountability by enabling 
regulators and others to readily identify those parties who are 
responsible for operations, including the establishment and maintenance 
of the group health plan. These commenters suggested that the existence 
of formalized and robust organizational structures could be an 
important form of protection against fraud and insolvency. The 
Department agrees with the commenters that the requirements of 
paragraph (b)(1)(iii) promote accountability and provide support 
against fraud and insolvency. The provision also ensures that the 
organization is a genuine organization with the organizational 
structure necessary to act ``in the interest'' of participating 
employers with respect to the MEP as the statute requires. For these 
reasons and to maintain consistency with the AHP Rule, the Department 
adopts these provisions in this final rule without modification.
d. Participating Employer Control Over the Group or Association
    Paragraph (b)(1)(iv) of the Proposed Rule required that member 
employers control the functions and activities of the group or 
association, and that the employer members that participate in the plan 
control the plan. Control must be present both in form and in 
substance. One commenter recommended that the final rule state that the 
control test may be satisfied indirectly through the regular nomination 
and election of directors, officers, or other similar representatives 
that control such functions and activities. The implicit concern raised 
by this commenter is that the control test, as proposed, could be 
construed as requiring that participating employers be responsible for 
management and day-to-day operations of the group or association and 
MEP in order for the group or association to qualify as bona fide.
    The final rule does not require group or association members to 
manage the day-to-day affairs of the group or association or the plan 
in order for the group or association to qualify as bona fide. As has 
long been the case, the Department will consider all relevant facts and 
circumstances in determining whether the functions and activities of 
the group or association are sufficiently controlled by its employer 
members, and whether the employer members who participate in the group 
or association's pension plan sufficiently control the group plan. In 
the Department's view, the following factors, although not exclusive, 
are particularly relevant for this analysis: (1) Whether employer 
members regularly nominate and elect directors, officers, trustees, or 
other similar persons that constitute the governing body or authority 
of the employer group or association and plan; (2) whether employer 
members have authority to remove any such director, officer, trustees, 
or other similar person with or without cause; and (3) whether employer 
members that participate in the plan have the authority and opportunity 
to approve or veto decisions or activities which relate to the 
formation, design, amendment, and termination of the plan, for example, 
material amendments to the plan, including changes in coverage, 
benefits, and vesting. The Department ordinarily will consider there to 
be sufficient control if these three conditions are met.\29\
---------------------------------------------------------------------------

    \29\ A number of commenters requested clarification or 
confirmation that the control test would be satisfied in an array of 
fact patterns involving different control structures, membership 
classifications, and participation privileges, including subgroup 
structures and associations of groups or associations. As stated 
elsewhere in this preamble, control must be present both in form and 
in substance, and whether control exists is determined under a facts 
and circumstances test. The Department declines in this preamble to 
address the application of the final rule to specific fact patterns. 
As noted above, the Department has procedures to answer inquiries of 
individuals or organizations affected, directly or indirectly, by 
ERISA as to their status under ERISA and as to the effect of certain 
acts and transactions. See ERISA Advisory Opinion Procedure 76-1 (FR 
Doc. 76-25168).
---------------------------------------------------------------------------

    The same commenter suggested that the final rule could contain a 
deeming provision under which the control test would be considered 
satisfied if, in the absence of actual control, it could be 
demonstrated that the group or association otherwise acts in the 
interest of its employer-members in relation to such a plan, including 
but not limited to demonstrating the existence of a fiduciary or 
contractual duty to act in the plan's interest. Whether group or 
association members in fact have sufficient control of the functions 
and activities of the group or association for it to be considered bona 
fide, however, is entirely independent of and unrelated to whether the 
group or association's key officials or board members are fiduciaries 
of the MEP. For these reasons, the Department declines to adopt the 
suggestions of these commenters.
e. Commonality of Interest
    Paragraph (b)(1)(v) of the Proposed Rule required that the employer 
members of the group or association of employers have commonality of 
interest. Paragraph (b)(2)(i)(A) of the Proposed Rule recognized 
commonality if the employers are in the same trade, industry, line of 
business or profession. Alternatively, paragraph (b)(2)(i)(B) of the 
Proposed Rule recognized commonality if each employer has a principal 
place of business in the same region that does not exceed the 
boundaries of a single State or a metropolitan area (even if the 
metropolitan area includes more than one State).
(i) Commonality Based on Size
    Commenters suggested the final rule should contain a new provision 
that finds sufficient commonality based on the ``small'' size of the 
participating employers, regardless of the small firms' type of 
business or location. Some of these commenters would include in this 
category businesses with no employees other than the owner. According 
to the commenters, small employers often share unique bonds, interests, 
needs, and regulatory schemes, and may have significantly more 
commonality of interest than those in the same industry or region due 
solely to their size.
    The Department does not agree that this characteristic should be 
included as additional commonality of interest criteria in the final 
rule. A test that would treat all small businesses--including sole 
proprietors/working owners--nationwide as satisfying the standard based 
on size alone--without regard to their products, services, lines of 
business, or location--would be too open-ended to establish the 
requisite commonality of interest. Moreover, to the extent this class 
of business is not part of a single trade, industry, line of

[[Page 37516]]

business, or profession, the geography standard for establishing a 
commonality of interest at paragraph (b)(2)(i)(B) of the final rule 
already provides this class of business with the ability to form State-
wide and metropolitan area groups and associations that qualify as an 
employer for purposes of sponsoring a MEP. Accordingly, this suggestion 
was not adopted. Commenters on the RFI, however, are invited to include 
additional comments on this topic in the context of open MEPs.
(ii) Commonality Based on Industry
    Paragraph (b)(2)(i)(A) of the Proposed Rule recognized commonality 
if the employers are in the same trade, industry, line of business, or 
profession. This reflects that employers in the same trade or industry, 
not only produce the same or similar products or services, but that 
they also tend to share, among other things, similar regulatory and 
market environments, economic trends, collective bargaining, and other 
similar business challenges that in turn may bear on the provision of 
benefits to their employees. Because of these shared traits, employers 
in the same trade or industry routinely associate in various industry 
or trade groups, and have done so historically. One commenter on the 
AHP Rule, for example, reported a membership of more than 7,000 trade 
associations. This commenter, which is an association of associations, 
stated that there is an organization or association for every industry 
and profession in the United States, and that over 60,000 are organized 
under Code section 501(c)(6) as trade associations and business 
leagues. As of 2017, the Internal Revenue Service recognized more than 
63,000 Code section 501(c)(6) trade and professional associations.\30\
---------------------------------------------------------------------------

    \30\ Internal Revenue Service Data Book, 2017, p. 57, 
Publication 55B Washington, DC (March 2018) (https://www.irs.gov/pub/irs-soi/17databk.pdf).
---------------------------------------------------------------------------

    Commenters requested that the Department clarify whether businesses 
that support a particular industry, or that are allied with a 
particular industry, are considered to be ``in the same industry'' as 
that term is used in paragraph (b)(2)(i)(A) of the Proposed Rule. For 
example, one commenter notes that an association of home builders that 
includes builders and developers might also include a wide variety of 
professionals, artisans, and tradespeople, such as plumbers, 
carpenters, and electricians, who support the home building and 
development industry. In addition, another commenter notes that an 
association of owners and operators of vending machine companies might 
also include vending machine manufacturers and vending machine 
suppliers, who support and are allied with the owners and operators of 
the vending machine companies. These commenters request clarification 
so that persons interested in forming MEPs would have more certainty 
regarding the permissible scope and membership classifications that 
would satisfy the final rule.
    Determinations of what is a ``trade,'' ``industry,'' ``line of 
business,'' or ``profession,'' as well as whether an employer fits into 
one or more these categories, are based on all the relevant facts and 
circumstances. In general, the Department intends for these terms to be 
construed broadly to expand employer and employee access to MEPs. 
Absent future guidance to the contrary, the Department ordinarily will 
not challenge any reasonable and good faith industry classification or 
categorization adopted by the group or association of employers. Nor 
will the Department challenge the inclusion of ``support'' or 
``allied'' businesses as members of the group or association if they 
share a genuine economic or representational interest with the other 
members. The Department declines in the preamble to address the 
application of the final rule to specific fact patterns. The Department 
has procedures to answer inquires of individuals or organizations 
affected, directly or indirectly, by ERISA as to their status under 
ERISA and as to the effect of certain acts and transactions. See ERISA 
Advisory Opinion Procedure 76-1 (FR Doc. 76-25168).
(iii) Commonality Based on Geography
    Paragraph (b)(2)(i)(B) of the Proposed Rule contained a geography 
test. It recognized commonality if each employer has a principal place 
of business in the same region that does not exceed the boundaries of a 
single State or a metropolitan area (even if the metropolitan area 
includes more than one State).
    Commenters recommended broadening the geography test in two 
different ways. Some commenters recommended expanding the geography 
test to allow regional commonality, rather than the state-based 
approach taken in the Proposed Rule. For this purpose, these commenters 
recommended using the regional divisions used by the U.S. Census 
Bureau, the districts used by the Federal Reserve, or the regions used 
by the Bureau of Economic Analysis. Alternatively, some commenters 
recommended expanding the geography test so that a MEP for employers in 
a metropolitan area that crosses two or more states would not need to 
exclude employers in those states that are located outside the 
metropolitan area. The first recommendation would foster large regional 
MEPs, potentially increasing economies of scale compared to state-based 
MEPs. The second recommendation would help employers in suburban and 
rural areas of states that may not have access to a statewide MEP. 
Because of the similarities between these recommendations and other 
ideas being explored in the RFI on open MEPs published elsewhere in 
today's Federal Register, the Department defers action on these 
recommendations. These recommendations provide a wide variety of other 
ways the Department could draw these lines, and the Department believes 
these issues would benefit from an additional opportunity for public 
comment. Accordingly, the Department includes a comment solicitation in 
the RFI on group or association MEPs covering larger geographic regions 
to ensure a fully developed public record before considering or taking 
any further action.
    Some commenters opposed the geography test due to its breadth. 
These commenters argued that this test in effect establishes fictional 
commonality among employers, because it is based on the simple fact 
that their businesses reside in the same state, regardless of the 
state's size or population. To these commenters, shared geography alone 
is not an indicator of commonality of business or economic interests 
among a state's inhabitants and should not be considered a sufficient 
nexus to establish commonality. These commenters fear that geography-
based commonality will lead to the establishment of large MEPs by state 
or even regional associations with large numbers of participating 
members that have virtually nothing in common other than location and 
no meaningful industry, professional, or business ties. The commenters 
expressed concern that the geography test will enable and result in the 
establishment of purely commercial arrangements by promoters with only 
pecuniary interests in participating members and participating members 
with only tenuous and remote connections and ties among themselves, all 
of which ultimately could result in an increase in arrangements that 
are susceptible to financial mismanagement, insolvency, and lack of 
fiduciary oversight. These commenters, therefore, recommended 
eliminating the geography test.
    The Department does not agree with these commenters that geography 
alone has no binding or cohesive impact on businesses. It seems plain 
that employers in the same geography share

[[Page 37517]]

common interests concerning employees' education and workforce 
development, taxation, transportation and commuting networks, the legal 
and regulatory environment, human capital pool, physical environment, 
local and state economic development partnerships, collective 
bargaining, and myriad other regional business trends and issues. That 
geography is a natural basis around which businesses organize 
themselves is evident in the number of state and local chambers of 
commerce in the United States, and their enrollment. There are roughly 
4,000 chambers of commerce in the United States.\31\ The territorial 
nature of these organizations speaks directly to the correlation 
between geography and common interests.
---------------------------------------------------------------------------

    \31\ According to the Association of Chamber of Commerce 
Executives (https://secure.acce.org/about/chambers-of-commerce/).
---------------------------------------------------------------------------

    Nor does the Department agree that it makes sense to eliminate the 
geography test. A primary purpose of the geography test is to make it 
easier for employers to band together and collectively benefit from the 
economies of scale that come from aggregation. Eliminating the 
geography test would undermine this intended benefit. Moreover, the 
geography test in the final rule also aligns with the geography test in 
the AHP Rule, thus making it possible for statewide groups and 
associations to better serve their members by offering access to both 
health and retirement benefits. Consequently, eliminating the geography 
test would undermine that member service opportunity as well.
    Nor does the Department agree that narrowing the geography test is 
necessary to guard against fraud and abuse. The final regulation 
contains numerous safeguards to prevent large aggregations of 
completely unrelated employers in MEPs and potential mismanagement and 
fraud. The final rule, for example, prohibits financial services firms 
from being the group or association that establishes the MEP, requires 
that functions of the group or association be controlled by employer 
members, requires the group or association to have a substantial 
business purpose other than providing benefits, and makes clear that 
the parties administering the MEP must fully adhere to ERISA's 
fiduciary standards. These provisions adequately guard against the 
concerns raised by the commenters, and ensure that the group or 
association will represent the common interests of its employer 
members.
    One commenter noted that the Seventh Circuit invalidated a 
geography-based condition for ``voluntary employees' beneficiary 
associations'' (VEBAs) described in section 501(c)(9) of the Code.\32\ 
While the commenter described that decision as applying in an analogous 
context, section 3(5) of ERISA and section 501(c)(9) of the Code have 
different language and purposes. In addition, the Department of 
Treasury and the IRS, rather than the Department of Labor, have 
jurisdiction over section 501(c)(9) of the Code.\33\
---------------------------------------------------------------------------

    \32\ Water Quality Association Employees' Benefit Corporation v. 
United States, 795 F.2d 1303 (7th Cir. 1986).
    \33\ In response to the Water Quality decision, the Internal 
Revenue Service issued a proposed regulation at 26 CFR 1.501(c)(9)-
2, which sets forth a modified geographic limitation.
---------------------------------------------------------------------------

(iv) Commonality Provisions In General
    Other commenters generally opposed the commonality provisions 
(whether based on geography or industry) because they are not expressly 
set forth in the statute. These commenters recommended eliminating the 
commonality provisions entirely, and focusing instead only on whether 
the group or association acts ``indirectly in the interest'' of an 
employer in relation to the MEP, without regard to any requirement of a 
common economic or representational nexus. While these commenters' 
arguments are not without force, the Department has decided for policy 
reasons not to simply eliminate these provisions.
    Even assuming that criteria other than commonality could satisfy 
section 3(5), the commonality provisions serve important policy goals 
in this context. First, keeping them in this final rule for MEPs 
establishes uniformity with the AHP Rule, thereby promoting consistent 
outcomes for employer-groups interested in sponsoring both health and 
retirement plans for their employees. Second, since employer groups 
often form on geographic and industry lines, the commonality provisions 
should be simple and natural to implement. Third, replacing the 
commonality provisions with looser or tighter criteria would likely 
require recalibration of the other conditions in paragraph (b) the 
final rule, all of which are designed to work in tandem with the 
commonality provisions. The more lenient test recommended by these 
commenters, for example, would require the Department to reevaluate and 
potentially expand the regulatory safeguards for MEPs, possibly to 
include new and potentially sophisticated and extensive compliance and 
enforcement mechanisms. This would be especially true in the case of 
open MEPs sponsored by financial institutions. Before proceeding with a 
less restrictive test (e.g., open MEPs), which is a much larger step, 
the Department intends to evaluate the responses to the RFI on open 
MEPs published elsewhere in today's Federal Register.
    These policy objectives more than adequately justify the 
commonality provisions in this final rule. Similar--albeit more 
restrictive--commonality provisions were present in decades of 
subregulatory guidance preceding and effectively superseded by this 
final rule. The prior subregulatory guidance, which was issued to 
address the ambiguity in section 3(5) of ERISA, used the commonality 
provisions essentially to help draw a line between commercial 
arrangements and associations that serve employers' interests. But 
commonality provisions--whether in the narrower form as they existed in 
the subregulatory guidance or in the expanded form as they exist in 
this final rule--are not directly in or necessarily compelled by the 
statute. And their long-term use in the prior subregulatory guidance in 
no way restricts the Department's ability now to modify them or even 
replace them altogether with different criteria. As a case in point, no 
commonality provisions in any form are present in the portion of this 
final rule governing bona fide PEOs because there the Department chose 
other criteria that adequately demonstrate when a ``person'' is able to 
adequately act in the employers' interests in relation to a MEP. And, 
furthermore, unlike the prior subregulatory guidance, the final rule's 
more expansive commonality provisions are the product of extensive 
notice and comment rulemaking, in which the Department considered many 
factors and provides herein ample justification for its decisions. In 
the end, the regulatory process of addressing the ambiguity in section 
3(5) of ERISA invariably required some measure of policy-making and 
line drawing, and the lines in this final rule reflect the reasoned 
policy judgment of the Department.
f. Provision Relating to Financial Services Firms
    Paragraph (b)(1)(vii) of the Proposal Rule generally prohibited an 
employer group or association from being a bank, trust company, 
insurance issuer, broker-dealer, or other similar financial services 
firm (including a pension record keeper or a third-party administrator) 
and from being owned or controlled by such a financial services

[[Page 37518]]

firm. Nearly every commenter in favor of open MEPs opposed this 
prohibition. Their recommendation to remove this prohibition, when 
combined with their recommendations on other provisions, would achieve 
their favored outcome. Other commenters, however, supported this 
provision. Their support is based on the premise that, unlike 
traditional groups or associations of employers such as chambers of 
commerce or business leagues, which exist to serve and advance the 
needs of their participating members, financial services firms exist 
primarily to serve and advance the business interests of the company or 
concern, including its shareholders or other owners. Several of these 
commenters argued that financial services firms should not be in the 
business of providing MEPs because of conflicts of interest.
    This provision is consistent with the AHP Rule, which in relevant 
part, prohibits health-insurance companies from being treated as a bona 
fide group or association. In that context, the Department concluded 
that a construction of ``employer'' encompassing insurance companies 
that are merely selling commercial insurance products and services to 
employers would effectively read the definition's employment-based 
limitation out of the statute. Applying a similar understanding of 
``group or association'' of employers in the pension context as in the 
AHP context promotes simplicity and uniformity in regulatory structure. 
The final rule therefore applies a similar approach to employer groups 
or associations sponsoring MEPs in the final rule. The Department may 
revisit this issue depending on future action, if any, taken in 
response to the RFI on open MEPs published elsewhere in today's Federal 
Register.

4. Bona Fide PEOs

    Although a number of commenters discussed the bona fide PEO 
provisions in the Proposed Rule, only a few comment letters actually 
addressed the substance of these provisions. Many commenters favoring 
open MEPs, for instance, raised the general concern that PEOs appeared 
to be given preferential treatment under the Proposed Rule. This 
observation came mainly from representatives of financial services 
firms, such as banks, insurance companies, and brokerage firms, who 
favor an open MEP structure. The Department does not agree that PEOs 
have been singled out for preferential treatment under the final rule. 
Rather, to the extent that PEOs stand in the shoes of their client 
employers for certain purposes and perform substantial employment 
functions on their client's behalf, the final rule merely recognizes 
that such PEOs are acting ``indirectly in the interest of [their 
client] employers'' under ERISA section 3(5) for purposes of sponsoring 
a MEP. Nevertheless, in response to these comments, as announced 
earlier in this document, elsewhere in today's Federal Register the 
Department published a RFI soliciting comments on a broad range of 
issues relating to open MEPs for possible future rulemaking. The RFI 
will give these commenters an opportunity to provide additional 
comments on possible extensions of the final rule. The substantive 
comments received in response to the Proposed Rule are addressed below 
in relation to the relevant provisions of the final rule.
a. The Four General Requirements
    Paragraph (c) of the Proposed Regulation included four requirements 
for a PEO to qualify as a ``bona fide'' PEO that may act ``indirectly 
in the interest of [its client] employers'' and, consequently, as an 
``employer'' under ERISA section 3(5) for purposes of sponsoring a MEP 
covering the employees of client employers. The final rule adopts these 
four requirements essentially as proposed. Paragraph (c)(1)(i) requires 
the PEO to perform substantial employment functions on behalf of the 
client employers. Paragraph (c)(1)(ii) requires the PEO to have 
substantial control over the functions and activities of the MEP, as 
the plan sponsor, the plan administrator, and a named fiduciary. 
Paragraph (c)(1)(iii) requires the PEO to ensure that each client-
employer participating in the MEP has at least one employee who is a 
participant covered under the MEP. Paragraph (c)(1)(iv) requires the 
PEO to ensure that participation in the MEP is limited to current and 
former employees of the PEO and of client-employers, as well as their 
beneficiaries.
    Regarding paragraph (c)(1)(i), a PEO's assumption and performance 
of substantial employment functions on behalf of its client-employers 
is one of the lynchpins of the final rule. Just as commonality and 
control help to establish the appropriate nexus for groups or 
associations of employers under paragraph (b) of the final rule, the 
PEO's performance of substantial employment functions for its client 
employers contributes significantly to the establishment of the 
requisite nexus for PEOs. Requiring the PEO to stand in the shoes of 
the participating client employers--by assuming and performing 
substantial employment functions that the client-employers otherwise 
would fulfill with respect to their employees--is what distinguishes 
bona fide PEOs under the final rule from service providers or other 
entrepreneurial ventures that in substance merely market or offer 
client-employers access to retirement plan services and products. This 
requirement applies a clear limiting principle to entities that can be 
said to be acting ``indirectly in the interest of'' another employer 
within the meaning of ERISA section 3(5).
    Importantly, a PEO's status under the final rule does not make the 
PEO more or less likely to have an employment relationship (whether 
referred to as joint employment or otherwise) with the client-employer, 
for purposes of other laws or liabilities. What constitutes joint 
employment for purposes of other laws and liabilities is an independent 
inquiry wholly unaffected by a PEO's potential status as an 
``employer'' within the meaning of ERISA section 3(5). Whether a PEO 
qualifies as an ERISA section 3(5) ``employer'' under the 
``indirectly'' provision has no effect on the rights or 
responsibilities of any party under any other law, including the Code 
or Fair Labor Standards Act, and neither supports nor prohibits a 
finding of an employment relationship in other contexts. The Department 
received a number of responses to its solicitation for comments on this 
issue. A number of commenters requested that the Department reiterate 
that participation in a MEP does not necessarily create a joint 
employment relationship by including language regarding joint 
employment in the operative text of the final rule. Another commenter 
asked that the Department state that MEP participation cannot be used 
as evidence of employee status for purposes of evaluating in any 
proceeding whether an individual is providing services as an 
independent contractor or employee. Although the Department recognizes 
the concern of commenters that participation in a MEP might create an 
inference under other laws, the Department's authority in issuing this 
final rule is limited to its interpretation of ERISA. Consequently, the 
operative text of the final rule, like the NPRM, does not contain a 
specific reference to the existence of a joint employment relationship 
under other laws.
    Regarding paragraph (c)(1)(ii), a second important limiting 
principle in construing section 3(5)'s ``indirectly in the interest 
of'' clause is that the PEO must have substantial control of the 
functions and activities of the employee benefit plan at issue. This 
construction comports with the reference in ERISA

[[Page 37519]]

section 3(5) to a person acting as the employer ``in relation to the 
plan.'' Paragraph (c)(1)(ii) of the final rule requires the PEO to have 
substantial control over the functions and activities of the MEP, as 
the plan sponsor (within the meaning of section 3(16)(B) of ERISA), the 
plan administrator (within the meaning of section 3(16)(A) of ERISA), 
and a named fiduciary (within the meaning of section 402 of ERISA). 
Looking to the PEO's substantial control of the MEP, as the sponsor, 
administrator, and fiduciary, is sensible given the ``in relation to 
the plan'' language of section 3(5) of ERISA. In response to comments, 
the final rule clarifies that because the PEO assumes these important 
statutory roles under ERISA, the PEO continues to have employee-benefit 
plan obligations to the employees of a client employer, as plan 
participants, even after that client employer no longer contracts with 
the PEO. The obligations of the PEO as the plan administrator and as a 
named fiduciary to the MEP's participants and beneficiaries does not 
terminate with the conclusion of a client contract between the PEO and 
the client employer; instead, these obligations continue until 
participants are no longer covered by the plan and beneficiaries are no 
longer receiving benefits (e.g., the individuals have received a lump-
sum distribution or a series of distributions of cash or other property 
which represents the balance of his or her credit under the plan, or a 
plan-to-plan transfer has occurred). As with pension plans in general, 
distributions are governed by the terms of the MEP as are plan-to-plan 
transfers.
b. Substantial Employment Functions Safe Harbor
    Whether a PEO satisfies the requirement, in paragraph (c)(1)(i), to 
perform substantial employment functions on behalf of its client 
employers is generally determined based on the facts and circumstances 
of the particular situation. This approach gives PEOs maximum 
flexibility to structure their affairs and recognizes that all PEOs do 
not necessarily follow the same business model or provide the exact 
same services to client employers. It also provides PEOs room for 
innovations in their business models and service packages in the 
future. At the same time, however, the Department understands that some 
entities may prefer more regulatory certainty in ordering their 
business affairs than comes from a facts-and-circumstances test. For 
this reason, the final rule contains a regulatory safe harbor separate 
from this facts-and-circumstances test.
    The safe harbor is contained in paragraph (c)(2) of the final rule 
and differs from the safe harbor structure in the Proposed Rule. The 
Proposed Rule contained two safe harbors, one for CPEOs within the 
meaning of Code section 7705, and another for PEOs that are not CPEOs 
(non-CPEOs). The change in structure stems from commenters who raised 
concerns regarding both the number and type of criteria required under 
the Proposed Rule. The commenters stated that the Proposed Rule's list 
of nine criteria for non-CPEOs were, depending on the particular 
criterion, unnecessary, unrealistic, not entirely consistent with 
industry practice, not exactly reflective of how PEOs and their clients 
share employer functions, misaligned with many state licensing 
requirements, or out of step with the advisory role of PEOs. Without 
significant adjustments to this safe harbor, including eliminating at 
least two of the Proposed Rule's nine criteria, the commenters asserted 
that many non-CPEOs would not qualify for the safe harbor. The 
commenters recommended adding a criterion that the PEO be licensed and 
registered in accordance with state law. With respect to the Proposed 
Rule's CPEO safe harbor, the commenters essentially argued that the 
Proposed Rule required PEOs to satisfy too many employment-function 
criteria and that CPEO status alone should be sufficient, assuming the 
service contract between the client and the CPEO meets the requirements 
in the Code. One person asked for clarification on what would happen 
under the safe harbor if a CPEO temporarily lost its certification, and 
therefore its CPEO status, under the Code for minor infractions, 
procedural missteps, or reasons having nothing to do with substantive 
performance of employment functions on behalf of client employers. One 
commenter argued that the standards should be the same for both CPEOs 
and non-CPEOs, and not more or less favorable to one business model 
over the other. This commenter viewed the Proposed Rule as favoring 
CPEOs.
    In response to these comments, the Department streamlined the 
Proposed Rule's safe harbor structure in the final rule. Unlike the 
Proposed Rule, which contained one safe harbor for PEOs that are CPEOs 
and a second safe harbor for PEOs that are non-CPEOs, the final rule 
contains only one safe harbor for all PEOs regardless of their status 
under the Code's CPEO provisions. There may be sound business reasons 
behind a PEO's decision to be a CPEO or not, and there may be equally 
sound business reasons behind a client employer's decision to choose or 
not choose a CPEO. Nevertheless, the status of a PEO under the Code's 
CPEO provisions is irrelevant to satisfying the safe harbor in the 
final rule; the relevant focus is the extent to which the PEO actually 
performs substantial employment functions on behalf of its client 
employers. The Department determined that the complexity of the 
Proposed Rule's safe harbor could be reduced by reducing and combining 
the essential elements of the Proposed Rule's two separate safe harbors 
into a single safe harbor that both CPEOs and non-CPEOs may rely on in 
connection with ERISA section 3(5). The Department reiterates that this 
is a safe harbor, intended to provide regulatory certainty. It is 
possible that a PEO could satisfy the statute's general facts and 
circumstances test, even if it does not satisfy the safe harbor.
    Instead of nine criteria, the new safe harbor contains only four 
criteria, and instead of allowing the PEO the choice of selecting five 
from among the nine criteria, the new safe harbor requires that the PEO 
satisfy all four criteria. The four criteria selected were drawn from 
the types of services and functions PEOs routinely provide to clients, 
and with reference to, but not dependent on, the CPEO statutory 
standards. After carefully reviewing the public comments, the 
Department selected the four criteria that the commenters indicated are 
central to all PEO client contracts and that, in the Department's view, 
clearly show the PEO acts indirectly in the interest of the client-
employer under ERISA section 3(5), in such a way and to such an extent 
that it sets the PEO apart from a mere service provider.
    The new safe harbor provides that a PEO will be considered to 
perform substantial employment functions on behalf of its client 
employers under the following circumstances: First, the PEO assumes 
responsibility for and pays wages to employees of its client-employers 
that adopt the MEP, without regard to the receipt or adequacy of 
payment from those client employers. Second, the PEO assumes 
responsibility to pay and perform reporting and withholding for all 
applicable federal employment taxes for its client employers that adopt 
the MEP, without regard to the receipt or adequacy of payment from 
those client employers. Third, the PEO plays a definite and 
contractually specified role in recruiting, hiring, and firing workers 
of its client-employers that adopt the MEP, in addition to the client-
employer's responsibility for recruiting, hiring, and firing workers. 
As explained below, a

[[Page 37520]]

PEO is considered to satisfy this standard if it recruits, hires, and 
fires, assumes responsibility for recruiting, hiring, and firing, or 
retains the right to recruit, hire, and fire workers of its client-
employers that adopt the MEP, in addition to the client-employer's 
responsibility for recruiting, hiring, and firing workers. Fourth, the 
PEO assumes responsibility for and has substantial control over the 
functions and activities of any employee benefits which the client 
contract with a client employer may require the PEO to provide, without 
regard to the receipt or adequacy of payment from those client 
employers for such benefits. All four of these criteria must be 
satisfied to meet the safe harbor.
    The Proposed Rule contained language providing that, depending on 
the facts and circumstances of the particular situation, even one of 
the safe harbor criteria alone may be sufficient to satisfy the general 
requirement that a PEO perform substantial employment functions on 
behalf of its client employers. The final rule does not include that 
language. The Department's view is that it is not appropriate to state 
that any single safe harbor criterion alone can be relied upon to 
satisfy the general requirement that a PEO perform substantial 
employment functions on behalf of its client employers--all four safe 
harbor criteria are necessary given the broad scope of activity 
encompassed by the new safe harbor test and the nature of the four 
remaining safe harbor criteria.
    With respect to the third criteria, the first sentence of paragraph 
(c)(2)(iii) of the final rule requires that the PEO have a definite and 
contractually specified role in recruiting, hiring, and firing workers 
of its client-employers that adopt the MEP, in addition to the client-
employer's responsibility for recruiting, hiring, and firing workers. 
This sentence recognizes that PEOs and their client- employers share 
responsibilities and can also individually retain responsibilities. For 
example, a PEO client contract may provide that the client-employer 
shall recruit, hire, and fire based on the needs of the business, but 
allocate certain termination responsibilities to the PEO, such as in 
the event a worksite employee engages in employment discrimination that 
violates Title VII of the Civil Rights Act of 1964, the Age 
Discrimination in Employment Act of 1967, or the Americans with 
Disabilities Act of 1990. This sentence also recognizes that PEOs 
commonly have a role, for payroll and other human resource purposes, in 
hiring and firing workers of client-employers, but client-employers 
determine who works at their worksites and under what conditions, as 
necessary to conduct their business.
    The second sentence of paragraph (c)(2)(iii) of the final rule goes 
on to explain that the requirement to have a ``definite and 
contractually specified role'' in the first sentence would be satisfied 
if, pursuant to the contract, the PEO recruits, hires, and fires; 
assumes the responsibility for recruiting, hiring, and firing; or 
retains the right to recruit, hire, or fire workers of its client-
employers that adopt the MEP. This text does not necessarily require 
that PEOs actually interview and select the employees of client 
employers in the traditional common-law sense, in which a business 
hires employee based on the skillset and needs of the particular 
business, but it does require that PEOs, at a minimum, retain a right 
or obligation under contract to recruit, hire, and fire as necessary to 
fulfill the PEO's responsibilities under the contract and applicable 
state law. For example, a PEO client contract may provide that 
following the client-employer's initial decision to hire an employee, 
that hiring decision does not become official until the PEO approves or 
ratifies the selection and finishes the administrative on-boarding 
process. Similarly, a PEO client contract may provide that client 
employer may not terminate a worksite employee until the PEO validates 
or approves the termination. The intent of paragraph (c)(2)(iii) is to 
accommodate the broad range of human resource services provided by and 
across the various PEO models, but at the same time to require a 
definite and contractually specified role for the PEO in the shared 
recruiting, hiring, and firing processes.
c. PEOs and Working Owners
    As discussed below in section 5 (d) of this preamble, the final 
rule--like the Proposed Rule--does not extend the working-owner 
provisions to bona fide PEOs.
d. PEOs and Health Plans
    Some stakeholders inquired whether a ``bona fide professional 
employer organization'' that is authorized under the final rule to 
sponsor a MEP for the employees of its client employers also would be 
able to establish and maintain a single plan, fund, or program of 
healthcare benefits for these same individuals. These stakeholders 
observed that the definition in section 3(5) of ERISA does not 
differentiate as to the type of benefit plan that an employer who meets 
the 3(5) definition may establish or maintain. Consequently, these 
stakeholders maintain, if a PEO meets the conditions to be an employer 
for purposes of sponsoring a single pension plan, the PEO also should 
be able to rely on that status to sponsor a single group health plan. 
The stakeholders also argued that the same or similar policy reasons 
that support expanded access to retirement plan options for small 
employers also support expanded access to healthcare options for these 
same employers. Section 3(5) of ERISA, in relevant part, provides that 
the term ``employer'' means any ``person'' acting indirectly in the 
interests of an employer, in relation to ``an employee benefit plan.'' 
Although the statute is neutral on its face as to the type of employee 
benefit plan being established or maintained by the ``person,'' the 
final rule does not address when a PEO may be able to act as an 
employer for establishing or maintaining a single group health plan to 
cover the employees of the PEO's client employers. Evidence suggests 
that some PEOs already offer health plans to the employees of their 
client employers and that this number could increase.\34\ But, as many 
commenters noted, health plan sponsorship may raise different issues 
and require different regulatory conditions than retirement plans.\35\ 
The topic of health plans is beyond the scope of this rulemaking 
project. The Proposed Rule did not address the topic of health plans in 
a meaningful way, or provide the opportunity for the public to provide 
comments. Accordingly, the PEO provisions in the final rule remain 
limited to defined contribution retirement plans. Until the Department 
takes additional regulatory or other action, a PEO interested in 
sponsoring a health arrangement for its client

[[Page 37521]]

employers must look to the terms of the statute.
---------------------------------------------------------------------------

    \34\ See ``2015 Employer Health Benefits Survey,`` Section 
Fourteen: Employer Opinions and Health Plan Practices, Kaiser Family 
Foundation, September 2015, available at https://www.kff.org/report-section/ehbs-2015-section-one-cost-of-health-insurance/. (Five 
percent of firms with 3 to 499 workers offering health benefits 
through a PEO (Exhibit 14.8). Six percent of covered workers 
enrolled in health benefits at firms with 3 to 499 workers are 
enrolled in a plan offered through a PEO. The uptake was greatest 
for firms that had 10-49 workers, with 8% of those firma offering 
health benefits through a PEO.
    \35\ As described above, the Department recognizes the 
importance of expanding access to affordable group health care 
coverage to small employers and accordingly, published a final rule 
on Association Health Plans that permits a bona fide group or 
association of employers to establish a single group health plan for 
the employer members' employees; and sets out specific requirements 
that such group or association must meet in order to be a 3(5) 
employer. 83 FR 28912 (June 21, 2018). One such requirement that is 
unique in the health plan context is that group health plan must not 
discriminate against employees in premiums, eligibility or benefits 
based on a health factor.
---------------------------------------------------------------------------

5. Working Owner Provision

a. In General
    Paragraph (d) of the Proposed Rule expressly provided that working 
owners, such as sole proprietors and other self-employed individuals, 
may elect to act as employers for purposes of participating in a bona 
fide employer group or association as described in (b)(1) of the 
proposed regulation and also be treated as employees of their 
businesses for purposes of being able to participate in the MEP. To 
qualify as a working owner, a person would be required to work at least 
20 hours per week or 80 hours per month, on average, or have wages or 
self-employment income above a certain level. This provision in the 
Proposed Rule is the same as the working-owner provision in the AHP 
Rule.\36\ Paragraph (d) of the Proposed Rule was limited to MEPs 
established and maintained by bona fide groups or associations of 
employers, and did not extend to MEPs established and maintained by 
PEOs. The public commenters supported this provision, which is adopted 
as proposed.\37\
---------------------------------------------------------------------------

    \36\ 83 FR at 28964. In State of New York v. United States 
Department of Labor, 363 F. Supp. 3d 109 (D.D.C. March 28, 2019), 
the District Court vacated portions of the Department's final rule 
on AHPs, including the working-owner provisions at 29 CFR 2510.3-
5(e). The Department disagrees with the District Court's ruling and 
an appeal has been filed.
    \37\ Nothing in the final rule should be read to indicate that a 
business that contracts with individuals as independent contractors 
becomes the employer of the independent contractors merely by 
participating in the MEP with those independent contractors who 
participate as working owners, or by promoting participation in a 
MEP by those independent contractors, as working owners.
---------------------------------------------------------------------------

b. Hours-Worked Provision
    Paragraph (d)(2) of the Proposed Rule included an ``hours worked'' 
provision that contained three essential requirements. First, the term 
``working owner'' means any person who a responsible plan fiduciary 
reasonably determines is an individual who has an ownership right of 
any nature in a trade or business, whether incorporated or 
unincorporated, including a partner or other self-employed individual. 
Second, this person also must earn wages or self-employment income from 
the trade or business for providing personal services to the trade or 
business. Third, this person must work ``on average at least 20 hours 
per week or at least 80 hours per month providing personal services to 
the working owner's trade or business.''
    At least one commenter requested clarification on how to apply the 
hours-worked provision to workers that do not have a defined work 
schedule that results in a steady and predictable 20-hour work week or 
80-hour month. The precise issue in need of clarification for this 
commenter is whether plan fiduciaries are permitted to use two-year 
averages when determining if working owners meet the minimum-hours-
worked requirement. According to this commenter, many workers in the 
construction industry have variable employment, which is dependent on 
the economy, weather, and other business and market factors. Working 
owners facing these predicaments may encounter periods of high demand 
for their services, during which they work greatly in excess of 80 
hours per month, followed by periods of sustained low demand, during 
which they work significantly less than 20 hours per week.
    While the Department in this document does not render an opinion on 
the categorical appropriateness of using two-year averages, the final 
rule expressly permits the use of averaging by plan fiduciaries to 
determine whether working owners satisfy the hours-worked provision in 
the final rule. The Department adopted averaging language in the AHP 
Rule in order to accommodate these ``variable workers'' in that 
context, and today imports that same language into this final rule. 
Thus, this final rule too allows flexibility in making an hours-worked 
determination to address situations in which a working owner's time 
performing services for his business varies due to various industry, 
seasonal, and other business and market factors. A working owner could 
demonstrate this by evidence of a work history or a reasonable 
projection of expected self-employment hours worked in a trade or 
business. While the final rule contains minimum weekly or monthly 
hours-worked requirements, it does not contain a maximum reference 
period over which averaging of hours is permitted or required. Since 
many of ERISA's and the Code's pension benefit provisions require 
annual recordkeeping and attention, many MEPs may decide to adopt 
annual or 12-month periods for averaging purposes out of administrative 
efficiency, although others may not. Ultimately, whether any particular 
maximum reference period is appropriate, however, is a matter within 
the discretion of the plan fiduciary taking into account the plan 
document and facts and circumstances of the particular situation. The 
exercise of this discretion by the plan is subject to the general 
fiduciary requirements of section 404(a) of ERISA. Accordingly, the 
final rule adopts paragraph (d)(2)(iii) of the Proposed Rule without 
change.
c. Wages or Self-Employment Income
    Paragraph (d)(2) of the Proposed Rule included an ``earned income'' 
alternative to the ``hours worked'' provision. Under the earned-income 
alternative, the working-owner must have ``wages or self-employment 
income from such trade or business that at least equals the working 
owner's cost of coverage for participation by the working owner and any 
covered beneficiaries in any group health plan sponsored by the group 
or association in which the individual is participating or is eligible 
to participate.'' For this purpose, the definitions of ``wages'' and 
``self-employment income in Code sections 3121(a) and 1402(b) (but 
without regard to the exclusion in section 1402(b)(2)), respectively, 
would apply.
    Several commenters were confused by the earned-income provision. 
Some thought it was unnecessary in light of the hours-worked provision. 
These commenters apparently understood the earned-income provision to 
be a requirement in addition to the hours-worked condition, and not an 
alternative. Other commenters did not understand the connection between 
health care premiums or cost of coverage and participation in a MEP. 
The commenters recommended eliminating this provision because they 
either thought the provision was a mistake or saw no need for it.
    The earned-income provision is an alternative to the hours-worked 
provision. These two separate provisions are disjunctive conditions, 
not conjunctive requirements. Thus, working owners may choose whichever 
test is more appropriate for their circumstances. Further, this 
provision offers administrative ease and convenience to the 
administrator of the MEP. This is because the Department expects many 
groups or associations of employers to offer to their members both AHPs 
and MEPs and, if the working owner makes enough money to be considered 
both an employer and employee under the AHP Rule, the working owner may 
also be considered both an employer and an employee for participating 
in a MEP. In finalizing the AHP Rule, the Department concluded that 
using the cost of coverage of benefits under the AHP was a meaningful 
metric to ensure that the working owner has a legitimate trade or 
business, keeping in mind that ERISA governs benefits provided in the 
context of a work relationship as opposed to the mere marketing of 
insurance to

[[Page 37522]]

individuals unrelated to their status as employees in a trade or 
business and any benefits they obtain through that status. Unlike 
healthcare coverage, participation in a MEP does not have a specific 
dollar amount associated with the benefits; thus, there is no minimum 
cost of participation, making reference to the cost of healthcare 
coverage a proxy in those cases where the group or association has such 
a plan. For these reasons, the earned-income provision was not 
eliminated.
    Section 401(c) of the Code provides rules for when a self-employed 
individual may participate in a qualified retirement plan. The 
Department solicited comments on whether there might be circumstances 
under which a ``working owner'' as defined in paragraph (d)(2) of the 
Proposed Rule might nonetheless fail to be described in section 401(c) 
of the Code, and if so whether the two provisions could and should be 
directly aligned. Comments were specifically requested on whether the 
final rule should limit the definition in paragraph (d)(2) to self-
employed individuals described in section 401(c) of the Code to avoid 
such failures. The Department received no comments indicating a need 
for or in support of such a limitation. One commenter opposed such a 
change. This commenter was concerned about the complexity associated 
with making determinations under section 401(c) of the Code and 
imposing such an obligation on plan fiduciaries of MEPs. In light of 
this comment, no changes in this regard were made to the final rule. 
However, the Department of the Treasury has advised that the inclusion 
of an individual who is not a common law employee or treated as an 
employee under section 401(c) would affect the qualified status of the 
plan. Also, they advised that a plan covering an owner-employee is 
qualified only if it limits contributions with respect to the owner-
employee in accordance with section 401(d) of the Code.
d. Extending Working Owner Provision to PEOs
    The final rule does not extend the working-owner provision to MEPs 
sponsored by PEOs under paragraph (c). Thus, a working owner's trade or 
business must have at least one common law employee to participate in a 
PEO's MEP under paragraph (c) of the final regulation. The Department 
understands that working owners without employees generally would not 
have a need for the employment services of PEOs, such as payroll, 
compliance with federal and state workplace laws, and human resources 
support. Thus, a trade or business without employees would not seem to 
have a genuine business need for a relationship with a PEO. 
Accordingly, the working-owner provision of the final rule only applies 
for purposes of participation in MEPs sponsored by a bona fide group or 
association.
    One commenter, however, indicated there may be circumstances in 
which a working owner without common law employees has a genuine need 
to be in a PEO's MEP. This occurs if the working owner has had common 
law employees and used a PEO, including joining the PEO's MEP, but was 
later unable to afford to continue to employ others and did not want to 
stop participating in the PEO plan, according to the commenter. The 
Department declines to expand the working-owner provision in paragraph 
(d) for this situation. In this situation, the working owner is still a 
participant covered under the plan with respect to his individual 
account balance because he is or may be eligible to receive a benefit, 
without regard to whether the working-owner continues his contract with 
the PEO. This status continues until the working-owner-participant is 
no longer covered by the plan (e.g., receives a lump-sum distribution 
or a series of distributions of cash or other property which represents 
the balance of his or her credit under the plan, or a plan-to-plan 
transfer has occurred).\38\ Thus, the working owner in this situation 
is treated the same as a former employee of a client employer that has 
an ongoing contract. The clause ``employees and former employees of 
former client employers who became participants during the contract 
period between the PEO and former client employers'' was added to 
paragraph (c)(1)(iv) of the final rule to make this point clear.
---------------------------------------------------------------------------

    \38\ 29 CFR 2510.3-3(d)(2)(ii).
---------------------------------------------------------------------------

6. Miscellaneous Topics

a. ERISA Fiduciary Status and Responsibilities of Sponsor and 
Participating Employers
    The Department received multiple comments on the application of 
ERISA's fiduciary rules to bona fide groups and associations, PEOs, and 
participating employers. Several commenters, for instance, asked the 
Department to provide guidance on fiduciary liabilities and 
responsibilities of a bona fide group or association or PEO that 
sponsors a MEP and clarify that any individual charged with the 
operation or management of a MEP is considered a fiduciary under ERISA. 
These commenters stressed that it is important for groups and 
associations and PEOs that sponsor a MEP to understand that they are 
obligated to protect the interests of the participants of the plan, and 
may be held individually liable if they fail to do so. Other 
commenters, by contrast, focused on participating or client employers; 
these commenters requested clarification of a participating or client 
employer's duty to prudently select and monitor the MEP in which the 
employer's employees participate.
    A MEP offered by a bona fide group or association, or by a PEO, 
under the final rule is subject to all of the provisions under title I 
of ERISA applicable to employee pension benefit plans, including the 
fiduciary responsibility and prohibited transaction provisions in part 
4 of ERISA. Bona fide groups or associations and PEOs that sponsor a 
MEP assume and retain responsibility for operating and administering 
the MEP, including ensuring compliance with these requirements.\39\ As 
an operational matter, the MEP's sponsor--and not the participating 
employers--would generally be designated as the plan administrator 
responsible for compliance with the requirements of title I of ERISA, 
including reporting, disclosure, and fiduciary obligations. Under this 
structure, the individual employers would not each have to act as plan 
administrators under ERISA section 3(16) or as named fiduciaries under 
section 402 of ERISA. Although participating employers would retain 
fiduciary responsibility for choosing and monitoring the arrangement 
and forwarding required contributions to the MEP, a participating 
employer could keep more of its day-to-day focus on managing its 
business, rather than on its plan.\40\ In the MEP context, although a 
participating employer would no longer have the day-to-day 
responsibilities of plan administration, the business owner would still 
need to prudently select and monitor the MEP sponsor and get periodic 
reports on the fiduciaries' management and administration of the MEP, 
consistent with prior Department guidance on MEPs.\41\
---------------------------------------------------------------------------

    \39\ Association Health Plan Final Rule, 83 FR 28912, 28937 
(June 21, 2018).
    \40\ Association Retirement Plans and Other Multiple-Employer 
Plans Proposed Rule, 83 FR 53534, 53535 (October 23, 2018).
    \41\ 29 CFR 2509.2015-02, Interpretive Bulletin Relating to 
State Savings Programs that Sponsor or Facilitate Plans Covered by 
the Employee Retirement Income Security Act of 1974 (``As a state-
sponsored multiple employer plan (``state MEP''), this type of 
arrangement could also reduce overall administrative costs for 
participating employers in large part because the Department would 
consider this arrangement as a single ERISA plan. Under a state MEP, 
each employer that chose to participate would not be considered to 
have established its own ERISA plan, and the state could design its 
defined contribution MEP so that the participating employers could 
have limited fiduciary responsibilities (the duty to prudently 
select the arrangement and to monitor its operation would continue 
to apply). The continuing involvement by participating employers in 
the ongoing operation and administration of a 401(k)-type individual 
account MEP, however, generally could be limited to enrolling 
employees in the state plan and forwarding voluntary employee and 
employer contributions to the plan.'').

---------------------------------------------------------------------------

[[Page 37523]]

    One commenter suggested that the Department should establish a 
``fiduciary checklist'' to assist small employers in discharging their 
selection and monitoring duties. According to this commenter, the 
checklist could encourage or require employers to: (1) Consider at 
least three plans; (2) examine how long the plan has been in existence; 
(3) review how many other employers and employees are actively 
enrolled; (4) consider the investment options and all employer and 
participant fees; and (5) receive and review a report on plan 
operations and periodically assess employee satisfaction and complaints 
at least annually. The Department recognizes that small employers often 
benefit from compliance guides of the type identified by the commenter. 
To assist business owners in carrying out their responsibilities under 
ERISA to prudently select and monitor plan service providers generally, 
the Department's EBSA, several years ago, published a compliance guide 
entitled ``Tips for Selecting and Monitoring Service Providers for your 
Employee Benefit Plan.'' The Department's EBSA maintains this document 
on its website and updates it periodically. The Department agrees with 
this commenter that small businesses may benefit from a checklist or 
similar guidance on how to discharge their duties to prudently select 
and monitor the MEP sponsor. Accordingly, the Department will review 
and possibly update the Tips document taking into consideration the 
five factors identified by the commenter.
    One commenter requested that the Department clarify that the duties 
of selection and monitoring are essentially the same for employers that 
decide to participate in a particular MEP as they are for employers 
that sponsor their own plans and delegate various plan investment and 
administrative functions to other plan fiduciaries. Otherwise, 
according to this commenter, any deviation from the existing framework 
for allocating fiduciary responsibility in the MEP context may create 
an incentive for employers with existing plans to transition to a MEP 
for the sole purpose of limiting their liability. One commenter 
additionally requested that the Department make it clear that, apart 
from a duty to select and monitor the operations of the MEP, if the 
employer selects any investment options, the employer must act and be 
liable in a fiduciary capacity for this act. Generally speaking, the 
process of selecting and maintaining service providers will vary 
depending on the plan and services to be provided. Thus, the 
commenters' questions are too generic to be answered in a vacuum. 
Nonetheless, the following principles are clear. The bona fide group or 
association typically, or the PEO always, is responsible for prudently 
selecting and monitoring the service providers of the MEP they hire, 
including any fiduciary service providers. In comparison, the business 
owner must prudently select and monitor the MEP sponsor and get 
periodic reports on the fiduciaries' management and administration of 
the MEP. Finally, the decision to include or delete funds from a plan's 
investment lineup, or to invest plan assets on the participant's behalf 
in a particular fund on that lineup, is a fiduciary decision, subject 
to the fiduciary provisions in Title I of ERISA.
b. Need for Reporting and Disclosure Changes
(i) In General
    The Proposed Rule solicited comments on whether any reporting or 
disclosure requirements are needed to ensure that participating 
employers, participants, and beneficiaries of MEPs are adequately 
informed of their rights and responsibilities with respect to MEP 
coverage and that the public has adequate information regarding the 
existence and operations of MEPs. Most responsive comments stated 
either that no new substantive requirements are needed, or that the 
Department should delay rulemaking on this subject until there is more 
experience with the types of MEPs described in this final rule.\42\ The 
Department agrees with this position and, therefore, the final rule 
does not contain modifications to the Department's reporting and 
disclosure requirements.
---------------------------------------------------------------------------

    \42\ The Department received several comments regarding 
electronic disclosures. Although electronic disclosures, like MEPs, 
were the subject of Executive Order 13847, they are part of a 
separate rulemaking process. The Department also received a comment 
regarding recommended disclosure requirements in an ``open MEP'' or 
``pooled employer plan'' context. As noted earlier in this preamble, 
open MEPs are the subject of a separate RFI and are not part of this 
final rule.
---------------------------------------------------------------------------

    Several commenters asked the Department to confirm that the group 
or association or PEO sponsoring the MEP, and not the participating 
employers, are generally responsible for the participant disclosures 
required by part 1 of ERISA. The Department confirms that the 
administrator of the MEP--and not the participating employers--is 
responsible for discharging the reporting and disclosure requirements 
under part 1 of ERISA. In most cases, the group or association 
sponsoring the MEP, and in all cases the PEO, will be the ERISA 3(16) 
plan administrator.
(ii) PEOs and Lists of Participating Employers
    Several commenters focused on the public's ability to obtain access 
to a MEP's annual report, including information regarding the identity 
of individual participating employers or the employer of a single 
participant. One commenter, for instance, requested that the 
administrator of a MEP, such as a PEO, be permitted to file the 
portions of the Form 5500 annual report that relate to participating 
employers on a confidential or redacted basis. In this commenter's 
view, PEOs will be less likely to sponsor a MEP (and participants will 
suffer) if competitors in the PEO marketplace are able to use publicly 
available information from the Form 5500 for targeted marketing aimed 
towards the PEO's client employers identified in the annual report.
    Conversely, other commenters favored public access to reported 
information and recommended that the Department make it even easier to 
locate and retrieve information about specific participating employers. 
For example, some commenters requested that the Department's website be 
modified to enable searches based on the name or EIN of a participating 
employer, rather than the name or EIN of the sponsor. One commenter, 
representing a state's department of child support services, stated 
that such agencies frequently need improved search methods to locate 
assets of non-custodial parents in order to pursue state domestic 
relations orders. This commenter believed that reporting should be 
strengthened to permit searches based not only on the name or EIN of 
the participating employer, but also based on the name of the plan 
participant.
    After reviewing the comments, the Department concluded that the 
subject matter is outside the scope of this rulemaking project. The 
Department may address some or all of this topic in a different 
rulemaking project in the future, or through subregulatory guidance, 
but does not otherwise address the comments in this final rule.

[[Page 37524]]

(iii) Fee and Conflict of Information Disclosures
    Commenters asked whether each participating employer must receive 
the disclosures required by section 408(b)(2) of ERISA and the 
regulations thereunder. ERISA section 408(b)(2) and 29 CFR 2550.408b-
2(c) require that certain service providers to pension plans disclose 
to a ``responsible plan fiduciary'' information about service 
providers' compensation and potential conflicts of interest. The 
regulation defines responsible plan fiduciary as ``a fiduciary with 
authority to cause the covered plan to enter into . . . the contract or 
arrangement.'' Typically, the responsible plan fiduciary is the plan 
administrator (within the meaning of section 3(16) of ERISA) or named 
fiduciary (within the meaning of section 402 of ERISA) of the MEP, and 
not the participating or client employer. Thus, to the extent 
participating or client employers in a MEP do not have such authority, 
the Department is of the view that section 408(b)(2) and the 
regulations thereunder do not require the disclosure of this 
information to them. At the same time, however, if the bona fide group 
or association or PEO itself is a covered service provider (within the 
meaning of 29 CFR 2550.408b-2(c)) with respect to the MEP, the group or 
association or PEO must furnish the specified information about its 
compensation and potential conflicts of interest to the participating 
or client employer at the time the participating employer or client 
employer is considering adopting or subscribing to the MEP and 
thereafter at intervals specified in the regulation. This information 
must be disclosed because when the participating or client employer 
adopts the MEP by executing the participation agreement or subscription 
document, the participating or client employer effectively is acting as 
a responsible plan fiduciary with respect to the group or association 
or PEO.
    In addition, participating or client employers have a duty under 
section 404 of ERISA to periodically monitor ongoing management and 
administration of the MEP to ensure the prudence of continued 
participation. Carrying out this duty may be aided by the periodic 
receipt from the administrator or named fiduciary of the MEP of 
information similar to that described in 29 CFR 2550.408b-2(c), with 
respect to other of the MEP's service providers.\43\ If the 
administrator or named fiduciary were to refuse to provide such 
information to a participating employer, either periodically or on 
request, such failure must be taken into account by the participating 
employer when deciding whether to continue participating in the MEP 
and, in and of itself, may justify or require a decision to cease 
participation.
---------------------------------------------------------------------------

    \43\ For example, GAO has emphasized the need for small 
businesses ``to understand plan fees in order to help participants 
secure adequate retirement savings. See GAO Testimony before the 
Senate Comm. on Health, Education, Labor and Pensions, Statement of 
Charles A. Jeszeck, GAO Director of Education, Workforce and Income 
Security, GAO-13-748T (July 16, 2013) at 16, https://www.gao.gov/assets/660/655889.pdf.
---------------------------------------------------------------------------

c. Termination or Severance Situations
    Several commenters asked for guidance on severance or termination 
situations. Specifically, these commenters asked about situations where 
the participating employer or client employer severs or terminates its 
relationship with the bona fide group or association or the bona fide 
PEO, respectively, after having adopted or joined the MEP. The 
commenters stated that in these situations, while the relationship 
between the participating employer or client employer and the bona fide 
group or association or the bona fide PEO is severed, the MEP itself 
does not necessarily terminate and, consequently, there may be no 
distributable event on which to authorize distributions of benefits to 
the employees of the employer. These commenters asked for guidance on 
whether these benefits may or must remain in the MEP, or whether they 
may or must be distributed or transferred to another plan, and for 
clarification of the status of the MEP as a single plan following the 
severance or termination.
    The commenters gave a few examples of likely severance or 
termination situations. In one example, an employer is a member of a 
local chamber of commerce, which meets the requirements to be a bona 
fide group or association, and the employees of this employer 
participate in the MEP sponsored by the chamber of commerce. The 
employer terminates its membership with the local chamber of commerce 
in favor of a statewide chamber of commerce. The employer ceases to 
have any control over the local chamber of commerce on cancelation of 
membership, despite the fact that such control is required under 
paragraph (b)(1)(iv) of the final rule. In another example, a different 
employer enters into a contract with a PEO that meets the requirements 
to be a bona fide PEO. This employer had 10 common law employees when 
it entered the contract with the PEO and enrolled the employees in the 
MEP sponsored by the PEO. Years later, after a business downturn, the 
employer must terminate the 10 employees and the only remaining worker 
is the owner. As a sole proprietor, the business no longer needs the 
services of the PEO and terminates the contract with the PEO. After 
termination of the contract, the PEO no longer performs substantial 
employment functions on behalf of this employer, despite the fact that 
the performance of substantial employment functions is required under 
paragraph (c)(1)(i) of the final rule.
    Whether the benefits of the employees of a severing or terminating 
employer may or must remain in the MEP, or whether they may or must be 
distributed or transferred to another plan should be memorialized in 
the plan document.\44\ Nevertheless, when a participating employer or 
client employer severs or terminates its relationship with a bona fide 
group or association or PEO, the severance or termination ordinarily 
extinguishes the nexus that supports the conclusion that the group or 
association or PEO is acting as the ``employer'' under section 3(5) of 
ERISA for purposes of sponsoring a plan for the employees of the 
participating employer or client employer. In this situation, 
therefore, the group or association or PEO and the participating 
employer or client employer will commonly want to implement a spin-off 
of the assets and liabilities of the employees of the severing or 
terminating employer, or a plan-to-plan transfer of those assets and 
liabilities to a separate plan meeting the requirements of the Code, if 
applicable, as soon as is reasonably practicable.
---------------------------------------------------------------------------

    \44\ Information Letter to John N. Erlenborn from Dennis M. 
Kass, Assistant Secretary, Pension and Welfare Benefits 
Administration, Department of Labor (March 13, 1986) (``we believe 
that the decision of whether to establish a successor plan, and if 
so, the type of such a plan, are clearly business decisions not 
subject to Title I of ERISA. As in the case of the decision to 
terminate, the decision to establish a successor plan involves the 
exercise of wholly voluntary settlor functions. Similarly, decisions 
about the design and provisions of any successor plan are not 
subject to Title I.''). Decisions on whether benefits may or must 
remain in the MEP, or whether they may or must be distributed are 
subject to applicable Code provisions.
---------------------------------------------------------------------------

    Importantly, when a participating employer or client employer 
severs or terminates its relationship with a bona fide group or 
association or PEO, the severance or termination does not extinguish 
any fiduciary obligations that the group or association or PEO owes to 
these participants as the plan administrator and named fiduciary of the 
MEP; rather, these obligations persist until the participants are no 
longer covered by the MEP. Pending a

[[Page 37525]]

spin-off or transfer, the MEP generally continues to constitute a 
single plan for purposes of title I of ERISA. But if the arrangement 
continues to operate in virtually the same manner as before the 
severance or termination (including the making of contributions by the 
participating employer or client employer that severs or terminates its 
relationship) and no party (the group or association, the PEO, or the 
participating employer or client employer, as applicable) takes action 
toward a spin-off or transfer within a reasonable timeframe following 
the severance or termination, the MEP will no longer constitute a 
single plan for purposes of ERISA. In this situation, the participating 
employer or client employer (i.e., the entity that severed or 
terminated its relationship with the group or association or PEO, 
failed to promptly implement a spin-off or transfer, and nevertheless 
continued the arrangement in virtually the same manner as before the 
severance or termination) will be considered to have established and 
maintained its own separate employee benefit plan. The group or 
association or PEO will be considered to be acting as a service 
provider to the plan of the former participating employer or client 
employer. The MEP--exclusive of the severed employer but inclusive of 
all remaining non-severed participating employers or client employers--
will continue to constitute a single plan for purposes of title I of 
ERISA.
d. Plan Governance Issues
    Commenters suggested that the Department consider the establishment 
of various new regulatory provisions governing certain aspects of MEP 
governance and administration. For example, one commenter recommended 
that the Department establish minimum standards in order for a person 
to sponsor and administer a MEP, including a minimum number of years of 
experience in providing retirement benefits, minimum staff 
qualifications, and minimum capital reserves. The Department believes 
it has appropriately addressed issues of MEP governance and 
administration to the extent such issues fall within the scope and 
subject of this rulemaking, the definition of ``employer'' in section 
3(5) of ERISA. The Department, however, will give further consideration 
to these recommendations in connection with the comments received in 
response to the RFI on open MEPs and any further rulemaking in this 
area.
    One commenter argued that MEPs should be required to have fair 
rules that apply to all employers, participants and beneficiaries. That 
commenter suggested that permitting MEPs to maintain multiple different 
rules for different employers or classes of employers will increase 
complexity and costs for all. As indicated, a MEP would be a single 
plan under title I of ERISA. As such, ERISA would apply to the MEP in 
the same way that ERISA applies to any employee benefit plan, but the 
MEP sponsor, typically acting as the plan's administrator and named 
fiduciary, would administer the MEP.\45\ This person will have 
considerable discretion in determining, as a matter of plan design or a 
matter of plan administration, how to treat the different interests of 
the multiple participating employers and their employees. Accordingly, 
this person, in distributing, investing, and managing the MEP's assets, 
must be neutral and fair, dealing impartially with the participating 
employers and their employees, taking into account any differing 
interests.\46\ For example, when the fiduciary of a large MEP uses its 
size to negotiate and secure discounted prices on investments and other 
services from plan services providers, as is generally required by 
ERISA, the fiduciary is bargaining on behalf of all participants 
regardless of the size of their employer, and should take care to see 
that these advantages are allocated among participants in an evenhanded 
manner. Treating participating employers and their employees 
differently without a reasonable and equitable basis would raise 
serious concerns for the Department under sections 404(a)(1)(A) and (B) 
of ERISA.
---------------------------------------------------------------------------

    \45\ As noted elsewhere, in the case of a PEO MEP under 
paragraph (c) of the proposal, the PEO, as the plan sponsor, must 
always act as the plan's administrator (within the meaning of 
section 3(16)(A)) and a named fiduciary (within the meaning of 
section 402 of ERISA) of the MEP.
    \46\ See Field Assistance Bulletin No. 2003-03 (addressing what 
rules apply to how expenses are allocated among plan participants in 
a defined contribution pension plan). See also Varity Corp. v. Howe, 
516 U.S. 489, 514 (1996) (``The common law of trusts recognizes the 
need to preserve assets to satisfy future, as well as present, 
claims and requires a trustee to take impartial account of the 
interests of all beneficiaries.''); Restatement (Second) of Trusts 
section 183 (``If a trust has two or more beneficiaries, the 
trustee, in distributing, investing, and managing the trust 
property, shall deal impartially with them, taking into account any 
differing interests.'')
---------------------------------------------------------------------------

    One commenter recommended that the final rule govern the number of 
designated investment alternatives under the MEP. One commenter 
recommended that the final rule should provide that if an employer 
fails to pay employee or employer required contributions, the MEP (or 
the Federal or State licensed investment provider) should be required 
to freeze the account and notify the employer, employee and the 
Department. Limiting investment options and remedying delinquent 
contributions are unrelated to the definition of ``employer'' in 
section 3(5) of ERISA. Accordingly, the Department considers these 
recommendations to be beyond the scope of this rulemaking.
    Finally, many commenters recommended that the final rule expressly 
permit MEPs to use electronic media as the default method of furnishing 
disclosures to participating employers, plan participants, and 
beneficiaries receiving benefits. Although improving the effectiveness 
of retirement plan disclosures, including possibly through the broader 
use of electronic delivery, is the subject of a different section of 
the MEP Executive Order (E.O. 13847), the Department intends to address 
this topic as part of a separate rulemaking process.
e. Corporate MEPs
    The Proposed Rule solicited comments on whether the final rule 
should address the status of so-called ``corporate MEPs,'' a term not 
defined in ERISA. 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 414(b), (c), 
and (m) of the Code.
    In response, one commenter provided an example of what it described 
as a very 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, the commenter 
stated that it does not appear that A and B would meet the commonality 
of interest conditions in the Proposed Rule 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, 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

[[Page 37526]]

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.\47\
---------------------------------------------------------------------------

    \47\ 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 U.S.C. 1060(c).
---------------------------------------------------------------------------

    On the record established thus far, however, the Department lacks a 
meaningful basis on which to determine the precise level of ownership, 
below the ownership thresholds of the aggregation rules in sections 
414(b) and (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. The Department, therefore, has decided to explore this 
topic further in the RFI, published elsewhere in today's Federal 
Register.
f. Interpretive Bulletin 2015-02
    This final rule clarifies, through regulation, when an employer 
group or association, or a PEO that meets certain conditions, may 
sponsor a single MEP under title I of ERISA (as opposed to providing an 
arrangement that constitutes multiple retirement plans). Based on its 
comprehensive review, the Department, therefore, is finalizing this 
regulation interpreting the term ``employer'' for purposes of ERISA 
section 3(5). A number of commenters expressed concern regarding the 
effect the rule, as proposed, could have on other guidance. Commenters 
specifically indicated that they were concerned with the effect of the 
proposed rule on State-sponsored MEPs subject to Interpretive Bulletin 
2015-02. (29 CFR 2509.2015-02). Nothing in this final rule affects 
prior guidance regarding how a State may act as an employer in relation 
to an employee benefit plan. Instead, this final rule provides 
additional regulatory certainty regarding when a group or association, 
or a PEO, acts ``indirectly in the interest of an employer'' in 
relation to a defined contribution multiple employer plan for purposes 
of ERISA section 3(5). Whether a person acts ``indirectly in the 
interest of an employer . . . in relation to an employee benefit plan'' 
for purposes of ERISA section 3(5) depends on the facts and 
circumstances, including the type of employee benefit plan the entity 
is acting in relation to, and the type of entity that is acting 
indirectly in the interest of an employer. Based on its review, the 
Department believes that this final rule will facilitate the adoption 
and administration of MEPs and will expand access to workplace 
retirement plans.
g. Plans Without Employees
    The final rule contains an amendment to a different regulation, at 
29 CFR 2510.3-3, to support the new working owner provision in 
paragraph (d) of the final rule. That regulation states the general 
principle that the term ``employee benefit plan'' shall not include any 
plan, fund, or program under which no employees are participants 
covered under the plan. The amendment makes it clear that this general 
principle does not stand in the way of working owners who want to 
participate in MEPs. The Proposed Rule sought comments on whether this 
fix would be sufficient or whether additional or different regulatory 
amendments should be made to confirm or clarify the long-established 
exclusion from ERISA of plans covering only individual owners (such as 
solo 401(k) plans), given the proposal to permit working owners to 
participate in ERISA-covered MEPs and ARPs. No commenter suggested the 
Proposed Rule was insufficient. One commenter, however, requested that 
the Department make it clear that plans without employees continue not 
to be covered by ERISA. In response to this comment, the Department 
confirms that the final rule permits working owners to participate in 
ERISA-covered MEPs without altering its position that a ``plan under 
which . . . only a sole proprietor'' participates ``will not be covered 
under title I.'' 29 CFR 2510.3-3(b). Thus, under the final rule, 
working owners without employees can join an ERISA-covered MEP or they 
can sponsor a defined contribution plans covering only themselves, 
which are (and historically have been) outside the coverage of title 1 
of ERISA.
h. Coordination With Other Federal Agencies
    Several commenters raised issues involving the Code and other 
federal laws beyond the Department's jurisdiction, and requested that 
the Department coordinate and work with the relevant agencies to 
provide guidance to facilitate and promote MEPs. For example, several 
commenters requested that the Department work and coordinate with the 
Department of the Treasury and the Internal Revenue Service (IRS) on 
guidance regarding the circumstances under which a MEP may satisfy the 
tax-qualification requirements in the Code, including the consequences 
if one or more employers that sponsored or adopted the plan fails to 
take one or more actions necessary to meet those requirements as 
directed by Executive Order 13847. On July 3, 2019, after consultation 
with the Department of Labor, the Department of the Treasury issued a 
notice of proposed rulemaking addressing these tax qualification issues 
in the Federal Register (84 FR 31777). Specifically, the proposed 
regulations would provide an exception, if certain requirements are 
met, to the application of the ``unified plan rule'' for a defined 
contribution MEP in the event of a failure by an employer participating 
in the plan to satisfy a qualification requirement or to provide 
information needed to determine compliance with a qualification 
requirement. These proposed regulations would affect MEPs, participants 
in MEPs (and their beneficiaries), employers participating in MEPs, and 
MEP plan administrators. The Department of Labor will continue to 
consult with the Department of the Treasury and the IRS in connection 
with their development of those regulations.
    Other commenters focused on the need for guidance or special rules 
on the Code's non-discrimination provisions more generally. One 
commenter requested the Department to coordinate with the IRS to 
clarify that MEPs are permitted to establish arrangements under section 
403(b) of the Code (programs for the purchase of an annuity contract or 
the establishment of a custodial account). One commenter requested that 
the Department coordinate and work with the IRS and the Securities and 
Exchange Commission to remove restrictions on the ability of 403(b) 
plans to invest in certain investment vehicles. These comments are 
beyond the scope of this final rule.
i. Severability
    Finally, paragraph (e)(1) of the final rule includes a severability 
provision that provides that if any of the provisions in the final rule 
are found to be invalid or stayed pending further agency action, the 
remaining portions of the rule would remain operative and available for 
qualifying employer groups or associations or PEOs. Paragraph (e)(2) of 
the final rule illustrates how the Department intends the severability

[[Page 37527]]

provision to apply in one specific situation. The example illustrates 
that if a federal court were to find the substantial business purpose 
test to be legally insufficient, then the substantial-business-purpose 
safe harbor (viability) becomes the whole of that part of the rule 
without the need for any further notice-and-comment rulemaking by the 
Department. Although the example is detailed and specific, the 
severability provision itself is not limited to the facts of the 
example. For instance, a ruling by a federal court that the ``working 
owners'' provision in section 2510.3-55(d) is void will not impact the 
ability of an employer group or association to meet the ``commonality 
of interest'' requirement in section 2510.3-55(b)(2) by being located 
in the same geographic locale. This example has been added to paragraph 
(e)(2) of the final rule to clarify the Department's intention that the 
severability provision is one of general applicability and, 
consequently, applies to the whole of the section and is not limited to 
any specific provision.

C. Regulatory Impact Analysis

1. Summary

    As discussed earlier in the preamble, this final rule is intended 
to facilitate the creation and maintenance of MEPs by clarifying the 
circumstances under which a person may act as an ``employer'' within 
the meaning of ERISA section 3(5) in sponsoring a MEP. Workplace 
retirement plans provide an effective way for employees to save for 
retirement. Unfortunately, however, many hardworking Americans, 
especially those employed by small businesses and those who are self-
employed, do not have access to a retirement plan at work. This has 
become a more significant issue as employees are living longer and 
facing the difficult prospect of outliving their retirement savings. 
Expanding access to private sector MEPs could encourage the formation 
of workplace retirement plans and broaden access to such plans among 
small employers and among individuals who are ``working owners'' 
without employees, referred to herein as the ``self-employed''.
    Many employer groups and associations have a thorough knowledge of 
the economic challenges their members face. Using this knowledge and 
the regulatory flexibility provided by this final rule, employer groups 
and associations can sponsor MEPs tailored to the retirement plan needs 
of their members at lower costs than currently available options. Thus, 
the final rule provides employers with an important option to increase 
access of workers, particularly those employed at small businesses and 
the self-employed, to high-quality workplace retirement plans.
    Small employers should benefit from economies of scale by 
participating in MEPs, which could reduce their administrative costs 
and plan fees. Like other large retirement plans, large MEPs created by 
sponsors meeting the conditions set forth in this rule would enjoy 
scale discounts and might exercise bargaining power with financial 
services companies. Large MEPs could pass some of these savings through 
to participating small employers. In particular, investment funds with 
tiered pricing have decreasing expense ratios based on the aggregate 
amount of money invested by a single plan.\48\ As a single plan, MEPs 
should lower the expense ratio for investment management through the 
pooling of investments from member employers, because the fee 
thresholds would apply at the MEP level rather than at the member 
employer level.\49\
---------------------------------------------------------------------------

    \48\ According to Morningstar, nearly half of all investment 
funds have management fee breakpoints at which fees are 
automatically reduced upon reaching an investment threshold. See 
Michael Rawson and Ben Johnson, ``2015 Fee Study: Investors Are 
Driving Expense Ratios Down,'' Morningstar, 2015, available at 
https://news.morningstar.com/pdfs/2015_fee_study.pdf.
    \49\ MEPs create a pool of assets for investment that, at the 
investment management level, are no different from pools of assets 
from other employee benefit plans. Consistent with the Department's 
view that the pool of assets is a single plan, the Department 
expects that breakpoints for expense ratios would be applied at the 
MEP level rather than at the member employer level.
---------------------------------------------------------------------------

    Many well-established, geographically based organizations, such as 
local chambers of commerce, are strong candidates to sponsor MEPs. 
Currently, these geographically based organizations are restricted from 
doing so as a sponsor of a single plan under title I of ERISA unless 
their MEP meets the requirements of the Department's 2012 subregulatory 
guidance for determining whether groups or associations of employers, 
or PEOs were able to act as employers under section 3(5) of ERISA.\50\ 
Such previous guidance requires groups or associations to have a 
particularly close economic or representational nexus to employers and 
employees participating in the plan. Many groups or associations and 
PEOs have identified these criteria, along with the absence of a clear 
pathway for PEOs to sponsor MEPs, as major impediments to the expansion 
of MEPs that are treated as single plans. By providing greater 
flexibility governing the sponsorship of MEPs, the Department expects 
this rule to reduce costs and increase access to workplace retirement 
plans for many employees of small businesses and the self-employed.
---------------------------------------------------------------------------

    \50\ EBSA Advisory Opinion 2012-04A (May 25, 2012).
---------------------------------------------------------------------------

    Other potential benefits of the expansion of MEPs include: (1) 
Increased economic efficiency as small firms can more easily compete 
with larger firms in recruiting and retaining workers, (2) increased 
acceptance of rollovers from other qualified plans, (3) enhanced 
portability for employees that leave employment with an employer to 
work for another employer participating in the same MEP, and (4) higher 
quality data (more accurate and complete) reported to the Department on 
the Form 5500.
    The Department is aware that MEPs could be the target of fraud or 
abuse. By their nature, MEPs have the potential to build up a 
substantial amount of assets quickly and the effect of any abusive 
schemes on future retirement distributions may be hidden or difficult 
to detect for a long period. The Department, however, is not aware of 
direct information indicating that the risk for fraud and abuse is 
greater for MEPs than for other defined contribution pension plans. Nor 
was such information received among the comments responding to the 
proposal. Furthermore, the Department has compliance assistance and 
enforcement systems in place to safeguard plan assets from fraud and 
abuse.
    The Department believes that participation in workplace retirement 
plans will increase because of this rule; however, there is some 
uncertainty regarding the extent of the increase. Participation levels 
in workplace retirement plans depend on both how many employers decide 
to offer plans and how many employees choose to participate in those 
plans. An employer's decision to offer a retirement plan relies on many 
factors, only some of which this final rule affects. If more employers 
adopt MEPs, it is unclear how many of their employees will choose to 
enroll and by how much aggregate retirement savings will increase. 
Nevertheless, given the significant potential for MEPs to expand access 
to affordable retirement plans, the Department has concluded that this 
rule will deliver social benefits that justify their costs. The 
Department's analysis is explained more fully below.
    As discussed earlier in the preamble, some commenters argued that 
to achieve an actual substantial increase in access to retirement 
plans, the Department must expand the rule to allow (1) ``open MEPs'' 
or ``pooled employer plans,'' which generally are arrangements that 
cover employees of employers with no

[[Page 37528]]

relationship other than their joint participation in the MEP, and (2) 
so-called ``corporate MEPs,'' which are plans that cover employees of 
related employers that are not in the same controlled group or 
affiliated service group.\51\ Although the Department did not include 
such arrangements in the final rule, it is simultaneously publishing 
elsewhere in today's Federal Register a related RFI regarding whether 
commercial service providers and corporate groups, other than employer 
groups or associations and PEOs, should be able to sponsor MEPs to 
develop a more robust record and obtain additional data regarding this 
issue.
---------------------------------------------------------------------------

    \51\ In Advisory Opinion 89-06A, the Department stated that it 
would consider a member of a controlled group of corporations that 
establishes a benefit plan for its employees and/or the employees of 
other members of the controlled group to be an employer within the 
meaning of ERISA section 3(5).
---------------------------------------------------------------------------

2. Executive Orders

    Executive Orders 12866 \52\ and 13563 \53\ direct agencies to 
assess all costs and benefits of available regulatory alternatives and, 
if regulation is necessary, to select regulatory approaches that 
maximize net benefits (including potential economic, environmental, 
public health and safety effects; distributive impacts; and equity). 
Executive Order 13563 emphasizes the importance of quantifying both 
costs and benefits, of reducing costs, of harmonizing rules, and of 
promoting flexibility.
---------------------------------------------------------------------------

    \52\ 58 FR 51735 (Oct. 4, 1993).
    \53\ 76 FR 3821 (Jan. 21, 2011).
---------------------------------------------------------------------------

    Under Executive Order 12866, ``significant'' regulatory actions are 
subject to review by the Office of Management and Budget (OMB). Section 
3(f) of the Executive Order defines a ``significant regulatory action'' 
as an action that is likely to result in a rule: (1) Having an annual 
effect on the economy of $100 million or more in any one year, or 
adversely and materially affecting a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or State, local or tribal governments or communities (also 
referred to as ``economically significant''), (2) creating a serious 
inconsistency or otherwise interfering with an action taken or planned 
by another agency, (3) materially altering the budgetary impacts of 
entitlement grants, user fees, or loan programs or the rights and 
obligations of recipients thereof, or (4) raising novel legal or policy 
issues arising out of legal mandates, the President's priorities, or 
the principles set forth in the Executive Order. It has been determined 
that this rule is economically significant within the meaning of 
section 3(f)(1) of the Executive Order. Therefore, OMB has reviewed the 
rule pursuant to the Executive Order.
    The background to the rule is discussed earlier in the preamble. 
This section assesses the expected economic effects of the rule.

3. Introduction and Need for Regulation

    While many Americans have accumulated significant retirement 
savings, many others have little, if any, assets saved for retirement. 
For example, the Employee Benefit Research Institute projects that 24 
percent of the population aged 35 to 64 will experience a retirement 
savings shortfall, meaning resources in retirement will not be 
sufficient to meet their average retirement expenditures.\54\ If 
uncovered long-term care expenses from nursing homes and home health 
care are included in the retirement readiness calculation, 43 percent 
of that population will experience a shortfall, and the projected 
retirement savings deficit is $4.13 trillion.\55\
---------------------------------------------------------------------------

    \54\ Jack VanDerhei, ``EBRI Retirement Security Projection 
Model[supreg](RSPM)--Analyzing Policy and Design Proposals,'' 
Employee Benefit Research Institute Issue Brief, no. 451 (May 31, 
2018).
    \55\ Id.
---------------------------------------------------------------------------

    Among all workers aged 26 to 64 in 2013, 63 percent participated in 
a retirement plan either directly or through a working spouse. That 
percentage ranged, however, from 52 percent of those aged 26 to 34 to 
68 percent of those aged 55 to 64; and from 25 percent for those with 
adjusted gross income (AGI) less than $20,000 per person to 85 percent 
for those with AGI of $100,000 per person or more.\56\
---------------------------------------------------------------------------

    \56\ Peter J. Brady, ``Who Participates in Retirement Plans,'' 
ICI Research Perspective, vol. 23, no. 05, (July 2017).
---------------------------------------------------------------------------

    Workplace retirement plans often provide a more effective way for 
employees to save for retirement than saving in their own IRAs. 
Compared with saving on their own in IRAs, workplace retirement plans 
provide employees with: (1) Higher contribution limits, (2) generally 
lower investment management fees as the size of plan assets increases, 
(3) a well-established uniform regulatory structure with important 
consumer protections, including fiduciary obligations, recordkeeping 
and disclosure requirements, legal accountability provisions, and 
spousal protections, (4) automatic enrollment, and (5) stronger 
protections from creditors.\57\ At the same time, workplace retirement 
plans provide employers with choice among plan features and the 
flexibility to tailor retirement plans that meet their business and 
employment needs.
---------------------------------------------------------------------------

    \57\ Section 522 of the Bankruptcy Code (11 U.S.C. 522), 
provides an unlimited exemption for SEP and Simple IRAs, and 
pension, profit sharing, and qualified plans, such as 401(k)s, as 
well as plan assets that are rolled over to an IRA. However, other 
traditional IRAs and Roth IRAs are protected up to a value of 
$1,283,025 per person for 2018 (inflation adjusted).
---------------------------------------------------------------------------

    In spite of these advantages, many workers, particularly those 
employed by small employers and the self-employed, lack access to 
workplace retirement plans. Table 1 below shows that at business 
establishments with fewer than 50 workers, 49 percent of the workers 
have access to retirement benefits.\58\ In contrast, at business 
establishments with more than 500 workers, 88 percent of workers have 
access to retirement benefits. Table 1 also shows that many small 
employers do not offer a retirement plan to their workers.\59\
---------------------------------------------------------------------------

    \58\ These statistics apply to private industry. U.S. Bureau of 
Labor Statistics, National Compensation Survey, Employee Benefits in 
the United States (March 2018).
    \59\ Id.

                               Table 1--Retirement Plan Coverage by Employer Size
----------------------------------------------------------------------------------------------------------------
                                                                        Workers                  Establishments
                                                        --------------------------------------------------------
                                                                                  Share
         Establishment size: number of workers           Share with access   participating in   Share offering a
                                                          to a retirement   a retirement plan  retirement plan %
                                                               plan %               %
----------------------------------------------------------------------------------------------------------------
1--49..................................................                 49                 34                 45
50--99.................................................                 65                 46                 75
100--499...............................................                 79                 58                 88
500+...................................................                 89                 76                 94

[[Page 37529]]

 
All....................................................                 66                 50                 48
----------------------------------------------------------------------------------------------------------------
Source: These statistics apply to private industry. U.S. Bureau of Labor Statistics, National Compensation
  Survey, Employee Benefits in the United States (March 2018).

    Surveys of employers have suggested several reasons employers--
especially small businesses--do not offer a workplace retirement plan 
to their employees. Regulatory burdens and complexity add costs and can 
be significant disincentives. A survey by the Pew Charitable Trusts 
found that only 53 percent of small- to mid-sized businesses offer a 
retirement plan, and 37 percent of those not offering a plan cited cost 
as the main reason.\60\ Employers often also cite annual reporting 
costs and exposure to potential fiduciary liability as major 
impediments to plan sponsorship.\61\
---------------------------------------------------------------------------

    \60\ The Pew Charitable Trusts, ``Employer Barriers to and 
Motivations for Offering Retirement Benefits,'' Issue Brief (June 
21, 2017), available at http://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2017/06/employer-barriers-to-and-motivations-for-offering-retirement-benefits#0-overview.
    \61\ See U.S. Government Accountability Office, GAO-12-326: 
``Private Pensions: Better Agency Coordination Could Help Small 
Employers Address Challenges to Plan Sponsorship'' (March 2012) at 
18-19. (https://www.gao.gov/products/GAO-12-326).
---------------------------------------------------------------------------

    Some employers may not offer retirement benefits because they do 
not perceive such benefits as necessary to recruit and retain good 
employees.\62\ In focus groups, many employers not offering retirement 
benefits reported believing that their employees would prefer to 
receive higher salaries, more paid time off, or health insurance 
benefits than retirement benefits.\63\ Small employers themselves may 
not have much incentive to offer retirement benefits because they are 
not sure how long their businesses are going to survive. This may lead 
them to focus on short-term concerns rather than their employees' long-
term well-being. In analyzing new establishments, researchers found 
that 56 percent did not survive for four years.\64\
---------------------------------------------------------------------------

    \62\ Employee Benefit Research Institute, ``Low Worker Take Up 
of Workplace Benefits May Impact Financial Wellbeing'' (April 10, 
2018).
    \63\ The Pew Charitable Trusts, ``Employer Barriers to and 
Motivations for Offering Retirement Benefits,'' 2017.
    \64\ Amy E. Knaup and Merissa C. Piazza, ``Business Employment 
Dynamics data: survival and longevity, II,'' Monthly Labor Review 
(Sept. 2007).
---------------------------------------------------------------------------

    Many small businesses may have not taken advantage of the existing 
opportunities to establish workplace retirement savings plans because 
they lack awareness. As found in a Pew survey, two-thirds of small- and 
mid-sized employers that were not offering a retirement plan said they 
were not at all familiar with currently available options such as 
Simplified Employee Pension (SEP) and Savings Incentive Match Plan for 
Employees (SIMPLE) plans.\65\
---------------------------------------------------------------------------

    \65\ The Pew Charitable Trusts, ``Employer Barriers to and 
Motivations for Offering Retirement Benefits,'' 2017.
---------------------------------------------------------------------------

    MEPs may address several of these issues. Specifically, to the 
extent that MEPs reduce the total cost of providing various types of 
plans to small employers, market forces may lead MEPs to offer and 
promote such plans to small employers that would otherwise have been 
overlooked because of high costs. Moreover, groups or associations and 
PEOs sponsoring MEPs sometimes may have more success raising awareness 
among small employers of the retirement savings plan options that exist 
and the benefits of establishing such plans as a tool for recruiting or 
retaining qualified workers. MEP sponsors may be particularly effective 
at raising awareness among small employers that are already members of 
the group or association or clients of the PEO.
    Small businesses typically have fewer administrative efficiencies 
and less bargaining power than large employers do. The final rule 
provides a way for small employers and the self-employed to band 
together in MEPs that, as single, large plans, have some of the same 
economic advantages as other large plans. As discussed above, the 
Department's prior subregulatory guidance limits the ability of small 
employers and self-employed individuals to join MEPs and thereby to 
realize attendant potential administrative cost savings. With certain 
exceptions, each employer operating a separate plan must file its own 
Form 5500 annual report; and generally, if the plan has 100 or more 
participants, an accountant's audit of the plan's financial position 
instead of relying on the audit of a combined plan.\66\ Each small 
employer also would have to obtain a separate fidelity bond satisfying 
the requirements of ERISA.\67\
---------------------------------------------------------------------------

    \66\ Note that ERISA regulations exempt small plans, generally 
those with under 100 participants, from the audit requirement if 
they meet certain conditions. 29 CFR 2520.104-46. In 2015, more than 
99 percent of small defined contribution pension plans that filed 
the Form 5500 or the Form 5500-SF did not attach an audit report.
    \67\ ERISA section 412 and related regulations (29 CFR 2550.412-
1 and 29 CFR part 2580) generally require every fiduciary of an 
employee benefit plan and every person who handles funds or other 
property of such plan to be bonded. ERISA's bonding requirements are 
intended to protect employee benefit plans from risk of loss due to 
fraud or dishonesty on the part of persons who handle plan funds or 
other property. ERISA refers to persons who handle funds or other 
property of an employee benefit plan as plan officials. A plan 
official must be bonded for at least 10 percent of the amount of 
funds he or she handles, subject to a minimum bond amount of $1,000 
per plan with respect to which the plan official has handling 
functions. In most instances, the maximum bond amount that can be 
required under ERISA with respect to any one plan official is 
$500,000 per plan; however, the maximum required bond amount is 
$1,000,000 for plan officials of plans that hold employer 
securities.
---------------------------------------------------------------------------

    As stated earlier in the preamble, on August 31, 2018, President 
Trump issued Executive Order 13847, ``Strengthening Retirement Security 
in America,'' stating that ``[i]t shall be the policy of the Federal 
Government to promote programs that enhance retirement security and 
expand access to workplace retirement savings plans for American 
workers.'' The Executive Order 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 participate in a MEP as a workplace 
retirement savings option offered to their employees, subject to 
appropriate safeguards, and (2) increase retirement security for part-
time workers, sole proprietors, working owners, and other 
entrepreneurial workers with

[[Page 37530]]

nontraditional employer-employee relationships by expanding their 
access to workplace retirement savings plans, including MEPs. The 
Executive Order further directed, to the extent permitted by law and 
supported by sound policy, the Department to consider within 180 days 
of the date of the Executive Order whether to issue a notice of 
proposed rulemaking, other guidance, or both, that would clarify when a 
group or association of employers, or other appropriate business or 
organization could be an ``employer'' within the meaning of ERISA 
section 3(5).
    In response to the Executive Order, the Department has conducted a 
thorough review of its current policies regarding MEPs and of comments 
received in response to the proposal, and has determined that its 
existing interpretive position is unnecessarily narrow. The Department 
has concluded that regulatory action is appropriate to establish 
greater flexibility in the regulatory standards governing the criteria 
that must exist in order for an employer group or association or PEO to 
sponsor a MEP.
    The final rule generally provides this flexibility by making five 
important changes to the Department's prior subregulatory guidance. 
First, it clarifies the existing requirement in prior subregulatory 
guidance that bona fide groups or associations must have at least one 
substantial business purpose unrelated to the provision of benefits. 
Second, it relaxes the requirement that group or association members 
share a common interest, as long as they operate in a common geographic 
area. Third, it makes clear that groups or associations whose members 
operate in the same trade, industry, line of business, or profession 
could sponsor MEPs, regardless of geographic distribution. Fourth, it 
clarifies that working owners without employees are eligible to 
participate in MEPs sponsored by bona fide employer groups or 
associations that meet the requirements of the rule. Fifth, it 
establishes criteria under which ``bona fide'' PEOs may sponsor MEPs 
covering the employees of their client employers.
    These criteria also result in more MEPs being treated consistently 
under the Code and title I of ERISA, and such consistency removes 
another barrier inhibiting the broader establishment of MEPs. As 
discussed earlier in the preamble, a retirement plan covering employees 
of multiple employers that satisfies the requirements of IRC section 
413(c) is considered a single plan under IRC section 413(c), which 
addresses the tax-qualified status of MEPs. Moreover, in Revenue 
Procedure 2002-21, 2002-1 C.B. 911, the IRS issued guidance that 
provided an avenue for PEOs to administer a MEP for the benefit of 
worksite employees of client organizations and not violate the 
exclusive benefit rule.\68\
---------------------------------------------------------------------------

    \68\ See Internal Revenue Code (IRC) section 413(c)(2) and 26 
CFR 1.413-2(c) of the Income Tax Regulations, which provide that, in 
determining whether a MEP is for the exclusive benefit of its 
employees (and their beneficiaries), all employees participating in 
the plan are treated as employees of each such employer. IRC 
sections 413(c)(1) and (3) provide that IRC sections 410(a) 
(participation) and 411 (minimum vesting standards) also are applied 
as if all employees of each of the employers who maintain the plan 
were employed by a single employer. Under Treas. Reg. 26 CFR 1.413-
2(a)(2), a plan is subject to the requirements of IRC section 413(c) 
if it is a single plan and the plan is maintained by more than one 
employer. See generally Treas. Reg. 26 CFR 1.413-1(a)(2), 1.413-
2(a)(2), and 1.414(l)-1(b)(1). However, the minimum coverage 
requirements of IRC section 410(b) and related nondiscrimination 
requirements are generally applied to a MEP on an employer-by-
employer basis.
---------------------------------------------------------------------------

    By establishing greater flexibility in the standards and criteria 
for sponsoring MEPs than previously articulated in subregulatory 
interpretive rulings under ERISA section 3(5), the final regulation 
facilitates the adoption and administration of MEPs and should expand 
access to, and lower the cost of, workplace retirement savings plans, 
especially for employees of small employers and certain self-employed 
individuals. At the same time, reflecting the position taken in its 
subregulatory guidance, the Department intends that the conditions 
included in the final rule will continue to distinguish plans sponsored 
by entities that satisfy ERISA's definition of ``employer'' from 
arrangements or services offered by other entities.

4. Affected Entities

    The final rule has the potential to encourage both the creation of 
new MEPs and the expansion of existing MEPs. As background for 
estimating the number of entities that would be affected by this rule 
and its impact, the Department has reviewed the characteristics of 
existing MEPs that file Forms 5500.\69\ Since this rule is limited to 
defined contribution pension plans, referred to in this document as 
``MEPs'' or ``DC MEPs,'' Table 2 presents statistics for DC MEPs only. 
Currently DC MEPs comprise only a small share of the private sector 
retirement system, as shown in Table 2.\70\ Based on the latest 
available data, about 4,630 DC MEPs exist with approximately 4.4 
million total participants, 3.7 million of whom are active 
participants. DC MEPs hold about $181 billion in assets.\71\
---------------------------------------------------------------------------

    \69\ ``Forms 5500'' refers collectively to the Form 5500 (Annual 
Return/Report of Employee Benefit Plan) and the Form 5500-SF (Annual 
Return/Report of Small Employee Benefit Plan).
    \70\ EBSA performed these calculations using the 2016 Research 
File of Form 5500 filings. For these purposes, EBSA classified a 
plan as a MEP if it indicated ``multiple employer plan'' status on 
the Form 5500 Part I Line A and if it did not report collective 
bargaining. The estimates are weighted and rounded, which means they 
may not sum precisely.
    \71\  Id.

                                                           Table 2--Current Statistics on MEPs
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                         Number of MEPs         Total participants              Active participants                Total assets
--------------------------------------------------------------------------------------------------------------------------------------------------------
MEP DC Plans.........................              4,630  4.4 million...................  3.7 million...................  $181 billion.
    As a share of all ERISA DC plans.               0.7%  4.4%..........................  4.6%..........................  3.2%.
MEP DC Plans.........................              4,630  4.4 million...................  3.7 million...................  $181 billion.
    401(k) Plans.....................              4,391  4.1 million...................  3.4 million...................  $166 billion.
    Other DC Plans...................                239  0.4 million...................  0.3 million...................  $15 billion.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: EBSA performed these calculations using the 2016 Research File of Form 5500 filings. For these purposes, EBSA classified a plan as a MEP if it
  indicated ``multiple employer plan'' status on the Form 5500 Part I Line A and if it did not report collective bargaining. The estimates are weighted
  and rounded, which means they may not sum precisely.

    Some DC MEPs are very large; 56 percent of total participants are 
in MEPs with 10,000 or more participants.\72\ Furthermore, 98 percent 
of total participants are in MEPs with 100 or more participants. There 
are 40 MEPs holding over $1 billion in assets each.\73\ In existing DC 
MEPs, 89 percent of participants direct all of the

[[Page 37531]]

investments, another 8 percent direct the investment of a portion of 
the assets, and the remainder did not direct the investment of any of 
the assets.\74\
---------------------------------------------------------------------------

    \72\ Id.
    \73\ Id.
    \74\ Id.
---------------------------------------------------------------------------

    There are caveats to keep in mind when interpreting the data 
presented in Table 2 above. For example, under the Department's prior 
subregulatory guidance, some plans established and maintained by groups 
of employers that might meet the conditions of the final rule, would 
have been deemed to be individual plans sponsored by each of the 
employers in the group. In these circumstances, each participating 
employer is required to file a Form 5500 just as it would if it 
established its own plan. These filings are indistinguishable from 
typical single-employer plans and do not appear in the data set as 
identifiable multiple employer plans.\75\
---------------------------------------------------------------------------

    \75\ In addition, there are some plans that are erroneously 
indicating that they are ``multiple employer plans'' rather than 
``single-employer plans'' under title I of ERISA. These plans may in 
fact be group or association or PEO-type MEPs that do not meet the 
conditions of the prior DOL subregulatory guidance. This distorts 
the database and leads to inaccurate estimates. In particular, the 
high number of plans erroneously reporting that they are MEPs likely 
overestimates the number of existing MEPs for purposes of title I of 
ERISA and underestimates the average size of MEPs.
---------------------------------------------------------------------------

    As stated earlier in the preamble, PEOs generally are entities that 
enter into agreements with client employers to perform certain 
employment responsibilities, such as tax withholding, to the 
individuals who perform services for the client employers. At the end 
of 2017, there were 907 PEOs operating in the United States, providing 
services to 175,000 client employers with 3.7 million employees.\76\ 
The final rule would allow certain PEOs meeting the requirements of 
paragraph (c) to sponsor MEPs and offer coverage to their client 
employers' employees.
---------------------------------------------------------------------------

    \76\ Laurie Bassi and Dan McMurrer, ``An Economic Analysis: The 
PEO Industry Footprint in 2018,'' National Association of 
Professional Employer Organizations, September 2018, available at 
https://www.napeo.org/docs/default-source/white-papers/2018-white-paper-final.pdf?sfvrsn=6.
---------------------------------------------------------------------------

    This final rule should benefit many workers that might otherwise 
tend to lack access to high-quality, affordable, on-the-job retirement 
savings opportunities. These workers include self-employed individuals 
without paid employees. Although there are other retirement savings 
vehicles available to these self-employed workers, they are less likely 
to access and participate in retirement plans. For example, only six 
percent of self-employed individuals participated in retirement plans 
in 2013.\77\ The final rule is expected to provide many of these self-
employed workers without employees with a new opportunity to access a 
retirement plan by joining a MEP. Approximately 8 million self-employed 
workers between ages 21 and 70, representing 6 percent of all similarly 
aged workers, have no employees and usually work at least 20 hours per 
week, and under this rule will become eligible to join MEPs.\78\ These 
workers are involved in a wide range of occupations: lawyers, doctors, 
real estate agents, childcare providers, as well as workers who provide 
on-demand services, often through online intermediaries, such as ride-
sharing online platforms. In many respects, the self-employed are quite 
different from employees in a traditional employer-employee 
arrangement. For example, self-employed persons often have complex work 
arrangements--they are more likely to work part-time or hold multiple 
jobs.\79\ Similarly, some provide on-demand services part-time, or as a 
second or third job.\80\
---------------------------------------------------------------------------

    \77\ Craig Copeland, ``Employment-Based Retirement Plan 
Participation: Geographic Differences and Trends, 2013,'' EBRI Issue 
Brief, no. 405, October 2014. In this report, the self-employed are 
mostly unincorporated.
    \78\ DOL tabulations of the February 2019 Current Population 
Survey basic monthly data.
    \79\ For tax administrative data, see Emilie Jackson, Adam 
Looney, and Shanthi Ramnath, ``The Rise of Alternative Work 
Arrangements: Evidence and Implications for Tax Filing and Benefit 
Coverage.'' U.S. Department of Treasury, Office of Tax Analysis, 
Working Paper 114 (January 2017). For survey data, see the Survey of 
Business Owners and Self-Employed Persons, 2012 from the Census 
Bureau at https://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=SBO_2012_00CSCBO04&prodType=table.
    \80\ ``Gig Economy and the Future of Retirement,'' Betterment, 
2018, available at https://www.betterment.com/wp-content/uploads/2018/05/The-Gig-Economy-Freelancing-and-Retirement-Betterment-Survey-2018_edited.pdf.
---------------------------------------------------------------------------

    On-demand workers, in particular, may face obstacles to saving for 
retirement. While a number of tax-preferred retirement savings vehicles 
are already available to them, many might find it difficult and 
expensive to navigate these options on their own.\81\ Relatively few of 
those workers have access to employer-sponsored retirement plans, one 
survey found.\82\ According to another survey, many traditional workers 
who pursue on-demand work on the side do so at least partly to help 
them save more for retirement. On the other hand, most of those for 
whom on-demand work is their main job have less than $1,000 set aside 
for retirement.\83\ MEPs should help raise awareness and ease entry to 
retirement coverage for broad classes of these workers, such as on-
demand drivers.
---------------------------------------------------------------------------

    \81\ For related information see, for example, Jonathan Kahler, 
``Retirement planning in a `gig economy','' Vanguard, June 13, 2018, 
available at https://vanguardblog.com/2018/06/13/retirement-planning-in-a-gig-economy/, which explains that working on demand is 
``running your own HR department and you're the benefits manager, 
which means taking sole responsibility for your retirement.''
    \82\ ``Gig Workers in America: Profiles, Mindsets, and Financial 
Wellness,'' Prudential, 2017, available at http://research.prudential.com/documents/rp/Gig_Economy_Whitepaper.pdf.
    \83\ ``Gig Economy and the Future of Retirement,'' Betterment, 
2018, available at https://www.betterment.com/wp-content/uploads/2018/05/The-Gig-Economy-Freelancing-and-Retirement-Betterment-Survey-2018_edited.pdf. This same survey found, however, that most 
on-demand workers are paying off debt.
---------------------------------------------------------------------------

    Electronically mediated workers obtain short jobs or tasks through 
websites or mobile apps that both connect them with customers and 
facilitate payment for the tasks. In May 2017, there were approximately 
1.6 million electronically mediated workers (1 percent of total 
employment) including all who performed electronically mediated work 
for their main job, a second job, or for additional work for pay.\84\ 
Compared to the overall workforce, electronically mediated workers are 
more likely to work part-time, more likely to have a bachelor's degree 
or higher, and more likely to be self-employed, particularly 
unincorporated self-employed.\85\ Independent contractors were more 
likely to perform electronically mediated work (6 percent) than workers 
in traditional employer-employee arrangements (less than 1 percent) in 
2017.
---------------------------------------------------------------------------

    \84\ ``Electronically mediated work: New questions in the 
Contingent Worker Supplement'' Monthly Labor Review, September 2018, 
Bureau of Labor Statistics.
    \85\ Id.
---------------------------------------------------------------------------

    Policymakers have expressed concern about how many workers 
providing on-demand services, and self-employed workers more generally, 
do not have access to retirement plans and appear to be ill-prepared 
for retirement. By allowing self-employed individuals who meet the 
requirements of the final rule to participate in MEPs, the rule will 
increase their access to retirement plans.

5. Benefits

a. Expanded Access to Coverage
    Generally, employees rarely choose to save for retirement outside 
of the workplace, despite having options to save in tax-favored savings 
vehicles, such as investing either in traditional IRAs or Roth IRAs. 
Thus, the availability of workplace retirement plans is a significant 
factor affecting whether workers save for their retirement. Yet, 
despite the advantages of workplace retirement plans, access to

[[Page 37532]]

such plans for employees of small businesses is relatively low. The 
final rule's expansion of access to certain MEPs enables groups of 
private-sector employers to participate in a collective retirement plan 
and provide employers with another efficient way to reduce some costs 
of offering workplace retirement plans. Thereby, more plan formation 
and broader availability of such plans should occur, especially among 
small employers.
    The MEP structure addresses significant concerns from employers 
about the costs of setting up and administering retirement benefit 
plans. In order to participate in a MEP, employers generally are 
required to execute a participation agreement or similar instrument 
setting forth the rights and obligations of the MEP and participating 
employers. These employers will then participate in a single plan, 
rather than sponsoring a separate ERISA-covered plan. Therefore the 
employer group or association or PEO will act as the ``employer'' 
sponsoring the MEP within the meaning of section 3(5) of ERISA. That 
employer group or association or PEO typically will assume the roles of 
plan administrator and named fiduciary. The individual employers would 
not be directly responsible for the MEP's overall compliance with 
ERISA's reporting and disclosure obligations. Accordingly, the MEP 
structure should address small employers' concerns regarding the cost 
associated with fiduciary liability of sponsoring a retirement plan by 
effectively transferring much of the legal risks and responsibilities 
to professional fiduciaries who would be responsible for managing plan 
assets and selecting investment menu options, among other things. 
Moreover, there is potential that more of the fiduciary responsibility 
will reside where it will be discharged more efficiently by qualified 
professionals with more skill than otherwise would be expected, which 
could ultimately lead to greater protection for plan participants and 
beneficiaries. MEPs as large plans will generally be likely to work 
with service providers with a high level of specialized expertise. 
Participating employers' continuing involvement in the day-to-day 
operations and administration of their MEP generally could be limited 
to enrolling employees and forwarding voluntary employee and employer 
contributions to the plan. Thus, participating employers could keep 
more of their day-to-day focus on managing their businesses, rather 
than their pension plans.
    Congress has repeatedly enacted legislation intended to lower 
costs, simplify requirements, and ease administrative burdens for small 
employers to sponsor retirement plans. For example, the Revenue Act of 
1978 \86\ and the Small Business Job Protection Act of 1996 \87\ 
established the SEP IRA plan and the SIMPLE IRA plan, respectively, 
featuring fewer compliance requirements than other plan types. The 
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) \88\ 
included provisions intended to increase access to retirement plans for 
small businesses by: (1) Eliminating top-heavy testing requirements for 
safe harbor 401(k) plans, (2) increasing contribution limits for 
employer-sponsored IRA plans and 401(k) plans, and (3) creating tax 
credits for small employers to offset new plan startup costs and for 
individuals within certain income limits who make eligible 
contributions to retirement plans. Despite these legislative efforts to 
increase access to retirement savings plans for small employers, as 
shown in Table 1, above, the percentage of the U.S. workforce 
participating in a workplace retirement plan remains around 50 percent. 
Therefore, a critical question is whether MEPs meeting the requirements 
of the final rule will increase access to workplace retirement plans 
when other initiatives have had limited effect. Several factors 
indicate to the Department that they should.
---------------------------------------------------------------------------

    \86\ Public Law 95-600, 152, 92 Stat. 2763, 2791.
    \87\ Public Law 104-188, 1421, 110 Stat. 1755, 1792.
    \88\ Public Law 107-16, 115 Stat. 38.
---------------------------------------------------------------------------

    First, the Department believes that employers may be more likely to 
participate in a MEP sponsored by a PEO, or a group or association of 
employers, with whom they have a pre-existing relationship based on 
trust and familiarity. For example, a PEO that performs payroll or 
human resources services for an employer would have connected 
information technology infrastructures that would facilitate efficient 
transfers of employee and employer contributions. Similarly, small 
employers obtaining health insurance coverage through an AHP sponsored 
by a group or association may find it convenient and cost effective to 
establish retirement plans offered by the same group or association. In 
many cases, the group or association and small employers may link their 
information technology systems to collect healthcare premiums from 
participating employers,\89\ and that infrastructure could also be used 
to collect retirement contributions, resulting in IT-related start-up 
costs savings. In addition, small employers and self-employed 
individuals may encounter fewer administrative burdens if the same 
group or association administers both their health and retirement 
plans.
---------------------------------------------------------------------------

    \89\ In the analogous context of health plans, the Department 
recently issued a final regulation that enhances the ability of 
unrelated employers to band together to provide health benefits 
through a single ERISA-covered plan called an AHP. The AHP Rule, 
which was issued on June 21, 2018, expands access to more 
affordable, quality health care by amending the definition of 
``employer'' under section 3(5) of ERISA for AHPs. Similar to this 
rule, the AHP Rule established alternative criteria under ERISA's 
section 3(5) definition of employer to permit more groups or 
associations of employers to establish a multiple employer group 
health plan that is a single employee welfare benefit plan within 
the meaning of ERISA section 3(1) of ERISA.
---------------------------------------------------------------------------

    Second, employers may be incentivized to sponsor these plans based 
on cost savings that may occur when payroll services are integrated 
with retirement plan record-keeping systems. Several firms in the 
market already provide payroll services and plan record-keeping 
services particularly tailored to small employers.\90\ These firms can 
afford to provide these integrated services at a competitive price, 
suggesting that integrating these services could lead to some 
efficiency gains. Since PEOs already provide payroll services to client 
employers, a MEP sponsored by a PEO can reap the benefits of 
integrating these services, which can in turn benefit participating 
employers through lower fees and ease of administration.
---------------------------------------------------------------------------

    \90\ Cerulli Associates, U.S. Retirement Markets 2016 (available 
at https://www.cerulli.com/vapi/public/getcerullifile?filecid=Cerulli-US-Retirement-Markets-2016-Information-Packet).
---------------------------------------------------------------------------

    As further discussed in the uncertainty section below, the 
Department does not have sufficient data to determine precisely the 
likely extent of participation by small employers and the self-employed 
in MEPs due to the final rule. Nor did the comments submitted in 
response to the proposed rule offer data on this topic. However, 
overall, the Department believes that the rule will provide a new 
valuable option for small employers and the self-employed to adopt 
retirement savings plans for their employees, which should increase 
access to retirement plans for many American workers.
b. Reduced Fees and Administration Savings
    Many MEPs would benefit from scale advantages that small businesses 
do not currently enjoy, and the Department expects that MEPs will pass 
some of the attendant savings onto participating

[[Page 37533]]

employers and participants.\91\ Grouping small employers together into 
a MEP could facilitate savings through administrative efficiencies 
(economies of scale) and sometimes through price negotiation (market 
power). The degree of potential savings may be different for different 
types of administrative functions. For example, scale efficiencies can 
be very large with respect to asset management, and may be smaller, but 
still meaningful, with respect to recordkeeping.
---------------------------------------------------------------------------

    \91\ See, e.g., BlackRock, ``Expanding Access to Retirement 
Savings for Small Business,'' Viewpoint (Nov. 2015).
---------------------------------------------------------------------------

    Large scale may create two distinct economic advantages for MEPs. 
First, as scale increases, marginal costs for MEPs would diminish and 
MEPs would spread fixed costs over a larger pool of member employers 
and employee participants, creating direct economic efficiencies. 
Second, larger scale may increase the negotiating power of MEPs. 
Negotiating power matters when competition among financial services 
providers is less than perfect and they can command greater profits 
than in an environment with perfect competition. Very large plans may 
sometimes exercise their own market power to negotiate lower prices, 
translating what would have been higher revenue for financial services 
providers into savings for member employers and employee participants.
    There may be times when scale efficiencies would not translate into 
savings for small employer members and their employee participants 
because regulatory requirements applicable to large MEPs may be more 
stringent than those applicable to most separate small plans. For 
example, some small plans are exempt from annual reporting 
requirements, and many others are subject to more streamlined reporting 
requirements than larger plans. More often, however, the legal status 
of MEPs as a single large plan will streamline certain regulatory 
burdens. For example, a MEP can file a single annual return/report and 
obtain a single bond in lieu of the multiple reports and bonds 
necessary when other providers of bundled financial services administer 
many separate plans.
    As a result of these two types of scale efficiencies, MEPs 
operating as a large single plan likely will secure substantially lower 
prices from financial services companies than such firms would charge 
separate small employer plans. Asset managers commonly offer 
proportionately lower prices, relative to assets invested, to larger 
investors, under so-called tiered pricing practices. For example, 
investment companies often offer lower-priced mutual fund share classes 
to customers whose investments in a fund surpass specified break 
points.\92\ These lower prices may reflect scale economies in any or 
all aspects of administering larger accounts, such as marketing, 
distribution, asset management, recordkeeping, and transaction 
processing. Large MEPs likely will qualify for lower pricing compared 
with separate plans of small employers. MEP participants that benefit 
from lower asset-based fees would enjoy superior investment returns net 
of fees.
---------------------------------------------------------------------------

    \92\ Sarah Holden, James Duvall, and Elena Barone Chism, ``The 
Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 
2017,'' ICI Research Perspective 24: no. 4 (June 2018) (concluding 
that 401(k) mutual fund investors pay lower expense ratios for a 
number or reasons, including ``market discipline'' imposed by 
performance- and cost-conscious plan sponsors). See also Russel 
Kinnel, ``Mutual Fund Expense Ratio Trends,'' Morningstar, (June 
2014), at https://corporate.morningstar.com/us/documents/researchpapers/fee_trend.pdf (accessed Aug. 21, 2018) (stating that 
breakpoints are built into mutual fund management fees so that a 
fund charges less for each additional dollar managed); Vanguard, 
``What You Should Know About Mutual Fund Share Classes and 
Breakpoints,'' at http://www.vanguard.com/pdf/v415.pdf (stating that 
investors in certain class shares may be eligible for volume 
discounts if their purchases meet certain investment levels, or 
breakpoints).
---------------------------------------------------------------------------

    The availability and magnitude of scale efficiencies may be 
different with respect to different retirement plan services. For 
example, asset management generally enjoys very substantial large-scale 
efficiencies. Investors of all kinds generally benefit by investing in 
large comingled pools. Even within large pools, however, small 
investors often pay higher prices than larger ones. Mutual funds often 
charge lower ``asset management'' fees for larger investors, in both 
retail and institutional markets. The Department invited but did not 
receive comments in response to the proposal regarding the degree to 
which large MEPs would provide small employers with scale advantages in 
asset management larger than those provided by other large pooled asset 
management vehicles, such as mutual funds, available to separate small 
plans.
    As with asset management, scale efficiencies often are available 
with respect to other plan services. For example, the marginal costs 
for services such as marketing and distribution, account 
administration, and transaction processing often decrease as customer 
size increases. MEPs, as large customers, may enjoy scale efficiencies 
in the acquisition of such services. It is also possible, however, that 
the cost to MEPs of servicing their small employer-members may diminish 
or even offset such efficiencies. Stated differently, MEPs scale 
efficiencies may not always exceed the scale efficiencies from other 
providers of bundled financial services used by small employers that 
sponsor separate plans. For example, small pension plans sometimes 
incur high distribution costs, reflecting commissions paid to agents 
and brokers who sell investment products to plans. MEPs, unlike large 
single-employer plans, must themselves incur some cost to distribute 
retirement plans to large numbers of small businesses. But relative to 
traditional agents and brokers, MEPs should reduce costs if they are 
able to take economic advantage of members' existing ties to a 
sponsoring group or association of employers or PEO. This can be a more 
efficient business model than sending out brokers and investment 
advisers to reach out to small businesses one-by-one, which could 
result in lower administrative fees for plan sponsors and participants.
    For much the same reason, MEPs sponsored by groups or associations 
of employers that perform other functions for their members in addition 
to offering retirement benefits (such as chambers of commerce or trade 
associations) and PEOs have the potential to realize administrative 
savings. These existing organizations may already have extensive 
memberships and relationships with small employers; thus, they may have 
low marginal costs for recruitment, setup, marketing, and 
administration. These organizations may have been limited in their 
ability to offer MEPs to some or all of their existing members and 
clients (for example, to working owners, workers outside of a common 
industry, or employers contracting with PEOs) by the Department's prior 
subregulatory guidance. Under the requirements of this final rule, 
however, they can newly provide such members and clients with access to 
MEPs.
    All of this suggests that many MEPs will enjoy scale efficiencies 
greater than the scale efficiencies available from other providers of 
bundled financial services. The scale efficiencies of MEPs, however, 
will still likely be smaller than the scale efficiencies enjoyed by 
very large single-employer plans. The Department invited but did not 
receive comments in response to the proposal on the nature, magnitude, 
and determinants of MEPs' potential scale advantages, and on the 
conditions under which MEPs will pass more or less of the attendant 
savings to different participating employers.

[[Page 37534]]

    By enabling MEPs to comprise otherwise unrelated small employers 
and self-employed individuals (1) who are in the same trade, industry, 
line of business, or profession, or (2) have a principal place of 
business with a region that does not exceed the boundaries of the same 
State or metropolitan area (even if the area includes more than one 
State), this rule will allow more MEPs to be established and to claim a 
significant market presence and thereby pursue scale advantages. 
Consequently, this rule should extend scale advantages to some MEPs 
that otherwise might have been too small to achieve them and to small 
employers and working owners that absent the rule would have offered 
separate plans (or no plans) but that under this final rule may join 
large MEPs.
    While MEPs' scale advantages may be smaller than the scale 
advantages enjoyed by very large single-employer plans, it nonetheless 
is illuminating to consider the deep savings historically enjoyed by 
the latter. Table 3 shows how much investment fees vary based on the 
amount of assets in a 401(k) plan.\93\ The table focuses on mutual 
funds, which are the most common investment vehicle in 401(k) plans, 
and shows that the average expense ratio for several dominant types of 
mutual funds is much lower for large plans than for smaller plans. And 
these data show the fees actually paid, rather than the lowest fees 
available to a plan. It is unclear what features and quality aspects 
accompanied the fees.
---------------------------------------------------------------------------

    \93\ Average expense ratios are expressed in basis points and 
asset-weighted. The sample includes plans with audited 401(k) 
filings in the BrightScope database for 2015 and comprises 15,110 
plans with $1.4 trillion in mutual fund assets. Plans were included 
if they had at least $1 million in assets and between 4 and 100 
investment options. BrightScope/ICI, ``The BrightScope/ICI Defined 
Contribution Plan Profile: A Close Look at 401(k) Plans, 2015'' 
(March 2018).

                                  Table 3--Average Expense Ratios of Mutual Funds in 401(k) Plans in Basis Points, 2015
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                             Balanced
                                                             Domestic      International   Domestic bond   International    Target date    mutual funds
                       Plan assets                         equity mutual   equity mutual   mutual funds     bond mutual    mutual funds     (non-target
                                                               funds           funds                           funds                           date)
--------------------------------------------------------------------------------------------------------------------------------------------------------
$1M-$10M................................................              81             101              72              85              79              80
$10M-$50M...............................................              68              85              59              77              68              64
$50M-$100M..............................................              55              72              44              66              54              50
$100M-$250M.............................................              52              68              40              64              55              45
$250M-$500M.............................................              49              63              36              67              50              42
$500M-$1B...............................................              45              60              33              65              50              39
More than $1B...........................................              36              52              26              65              48              32
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Average expense ratios are expressed in basis points and asset-weighted. The sample includes plans with audited 401(k) filings in the
  BrightScope database for 2015 and comprises 15,110 plans with $1.4 trillion in mutual fund assets. Plans were included if they had at least $1 million
  in assets and between 4 and 100 investment options. BrightScope/ICI, ``The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k)
  Plans, 2015'' (March 2018).

    There are some important caveats to interpreting Table 3. The first 
is that it does not include data for most of the smallest plans 
because, generally, plans with fewer than 100 participants generally 
are not required to submit audited financial statements because they 
file a Form 5500-SF. The second is that there is variation across plans 
in whether and to what extent recordkeeping costs are included in the 
mutual fund expense ratios paid by participants. In plans where 
recordkeeping is not entirely included in the expense ratios, it may be 
paid by employers, as a per-participant fee, or as some combination of 
these. These caveats mean that the link between fees and size could be 
either stronger or weaker than Table 3 suggests, creating some 
uncertainty about how large an advantage MEPs will offer.
    An alternative method of comparing potential size advantages is a 
broader measure called ``total plan cost'' calculated by 
BrightScope.\94\ Total plan cost likely provides a better way to 
compare costs because, in addition to costs paid in the form of expense 
ratios, it includes fees reported on the audited Form 5500. It 
comprises all costs regardless of whether they are paid by the plan, 
the employer, or the participants. Total plan cost includes 
recordkeeping services for all plans, for example, which is one reason 
that it is a more comparable measure than the data presented above in 
Table 3. When plans invest in mutual funds and similar products, 
BrightScope uses expense data from Lipper, a financial services firm. 
When plans invest in collective investment trusts and pooled separate 
accounts, BrightScope generates an estimate of the investment fees.
---------------------------------------------------------------------------

    \94\ Id.
---------------------------------------------------------------------------

    Using total plan cost yields generally very similar results about 
the cost differences facing small and large plans. Table 4 shows that 
very few of the smaller plans are enjoying the low fees that are 
commonplace among larger plans.\95\
---------------------------------------------------------------------------

    \95\ Id. Data is plan-weighted. The sample is plans with audited 
401(k) filings in the BrightScope database for 2015, which comprises 
18,853 plans with $3.2 trillion in assets. Plans were included if 
they had at least $1 million in assets and between 4 and 100 
investment options.

                              Table 4--Larger Plans Tend To Have Lower Fees Overall
----------------------------------------------------------------------------------------------------------------
                                                                    Total plan cost (in basis points)
                      Plan assets                       --------------------------------------------------------
                                                          10th percentile         Median        90th percentile
----------------------------------------------------------------------------------------------------------------
$1M-$10M...............................................                 75                111                162
$10M-$50M..............................................                 61                 91                129
$50M-$100M.............................................                 37                 65                 93
$100M-$250M............................................                 22                 54                 74
$250M-$500M............................................                 21                 48                 66

[[Page 37535]]

 
$500M-$1B..............................................                 21                 43                 59
More than $1B..........................................                 14                 27                 51
----------------------------------------------------------------------------------------------------------------
Source: Data is plan-weighted. The sample is plans with audited 401(k) filings in the BrightScope database for
  2015, which comprises 18,853 plans with $3.2 trillion in assets. Plans were included if they had at least $1
  million in assets and between 4 and 100 investment options. BrightScope/ICI, ``The BrightScope/ICI Defined
  Contribution Plan Profile: A Close Look at 401(k) Plans, 2015'' (March 2018).

    Deloitte Consulting LLP conducted a survey of 361 defined 
contribution plans for the Investment Company Institute. The study 
calculates an ``all-in'' fee that is comparable across plans including 
both administrative and investment fees paid by the plan and the 
participant. Generally, small plans with 10 participants are paying 
approximately 50 basis points more than plans with 1,000 
participants.\96\ Small plans with 10 participants are paying about 90 
basis points more than large plans with 50,000 participants. Deloitte 
predicted these estimates by analyzing the survey results using a 
regression approach calculating basis points as a share of assets.
---------------------------------------------------------------------------

    \96\ Deloitte Consulting and Investment Company Institute, 
``Inside the Structure of Defined Contribution/401(k) Plan Fees, 
2013: A Study Assessing the Mechanics of the `All-in' Fee'' (Aug. 
2014).
---------------------------------------------------------------------------

    These research findings have shown that small plans and their 
participants generally pay higher fees than large plans and their 
participants. Because this rule will give many small employers the 
opportunity to join a MEP, some of which are very large plans, many of 
these employers will likely incur lower fees. Many employers that are 
not currently offering any retirement plan may join a MEP, leading 
their employees to save for retirement. Many employers already 
sponsoring a retirement plan might decide to join a MEP instead, 
seeking lower fees and reduced fiduciary liability exposure. If there 
indeed are lower fees in the MEPs than in their previous plans, those 
lower fees could translate into higher savings.
c. Reporting and Audit Cost Savings
    The potential for MEPs to enjoy reporting cost savings merits 
separate attention because it is shaped not only by economic forces but 
also by the reporting requirements applicable to different plans. On 
the one hand, a MEP that is a large, single plan can file a single 
report and conduct a single audit, while separate plans may be required 
to file separate reports and conduct separate audits. On the other 
hand, a MEP that is a large plan is generally subject to more stringent 
reporting and audit requirements than a small plan, which likely files 
no or streamlined reports and undergoes no audits. Therefore with 
respect to reporting and audits, MEPs generally can offer substantial 
savings to employers that would otherwise be subject to stringent 
reporting and audit requirements in their own plan and modest savings 
to small employers that would not be subject to such requirements. In 
fact, under some circumstances small employers might actually incur 
slightly higher reporting and audit costs by joining a MEP. This cost 
increase may still be offset by benefits described in other sections. 
From a broader point of view, if auditing becomes more prevalent 
because small employers join MEPs, that would lead to more and better 
quality data that would improve security for employers, participants 
and beneficiaries.
    Sponsors of ERISA-covered retirement plans generally must file a 
Form 5500 annually, including all required schedules and attachments. 
The cost burden incurred to satisfy the Form 5500 related reporting 
requirements varies by plan type, size, and complexity. Analyzing the 
2016 Form 5500 filings, the Department estimates that the average cost 
to file the Form 5500 is as follows: $276 Per filer for small 
(generally fewer than 100 plan participants) single-employer DC plans 
eligible for Form 5500-SF, $435 per filer for small single-employer DC 
plans not eligible to file Form 5500-SF, and $1,686 per filer for large 
(generally 100 participants or more) single-employer DC plans.
    Additional schedules and reporting may be required for large and 
complex plans. For example, large retirement plans are required to 
attach auditor's reports with Form 5500. Most small plans are not 
required to attach such reports.\97\ Hiring an auditor and obtaining an 
audit report can be costly for plans, and audit fees may increase as 
plans get larger or more complex. A recent report states that the fee 
to audit a 401(k) plan ranges between $6,500 and $13,000.\98\ One 
comment letter responding to the proposal reported that their audit 
cost $24,000.\99\ Incorporating the comment, the Department adjusted 
the estimated audit cost range.\100\ The Department uses the 
intermediate value of $13,000 as the estimated audit cost in order to 
calculate cost savings estimates.
---------------------------------------------------------------------------

    \97\ Under certain circumstances, some small plans may still 
need to attach auditor's reports. For more details, see https://www.dol.gov/sites/default/files/ebsa/employers-and-advisers/plan-administration-and-compliance/reporting-and-filing/form-5500/2017-instructions.pdf. In 2015, approximately 3,600 small plans that 
filed the Form 5500 and not the Form 5500-SF submitted audit reports 
as part of their Form 5500 filing.
    \98\ See https://www.thayerpartnersllc.com/blog/the-hidden-costs-of-a-401k-audit.
    \99\ See comment letter #6 Employers Association of New Jersey, 
EANJ.
    \100\ In estimating the range of the audit cost, $6,500 is 
assumed to be a lower end, $24,000 is assumed to be a higher end, 
and $13,000 is assumed to be a good intermediate estimate.
---------------------------------------------------------------------------

    If an employer joins a MEP, it can save some costs associated with 
filing Form 5500 and fulfilling audit requirements because a MEP is a 
single plan. Thus, one Form 5500 and audit report will satisfy the 
reporting requirements. This means each participating employer would 
not need to file its own, separate Form 5500 and, for large plans or 
those few small plans that do not meet the small plan audit waiver, an 
audit report. According to a GAO report, most of the association MEPs 
that they interviewed had over 100 participating employers.\101\ PEOs 
also tend to have a large number of client employers, at least 400 
participating employers in their PEO-sponsored DC plans.\102\ Assuming 
reporting costs are equally shared by participating employers within a 
MEP, an employer joining a MEP can save virtually all the reporting 
costs discussed above. As PEOs seem to have, on average, more 
participating employers than associations, an employer might save 
slightly more by joining a PEO MEP compared to joining

[[Page 37536]]

a group or association MEP, but the additional savings are 
minimal.\103\ Large plans could enjoy even higher cost savings if audit 
costs are taken into account. The Department estimates that reporting 
cost savings associated with Form 5500 and an audit report would be 
approximately $14,539 per year for a large plan joining an association 
MEP and $14,649 per year for a large plan joining a PEO MEP.\104\
---------------------------------------------------------------------------

    \101\ U.S. Government Accountability Office, GAO-12-665, 
``Federal Agencies Should Collect Data and Coordinate Oversight of 
Multiple Employer Plans,'' (Sept. 2012) (https://www.gao.gov/products/GAO-12-665).
    \102\ Id.
    \103\ In terms of cost savings associated with Form 5500 filings 
without accounting for audit costs, cost savings for small single-
employer DC plans filing Form 5500-SF would be $259.50 per filer if 
it joins an association-sponsored MEP or $272.15 per filer if it 
joins a PEO-sponsored MEP; for small single employer DC plans not 
eligible for Form 5500-SF cost savings would be $417.76 per filer if 
it joins an association-sponsored MEP as opposed to $430.40 per 
filer if it joins a PEO-sponsored MEP; for large single employer DC 
plans cost savings would be $1,668.91 per filer if it joins an 
association-sponsored MEP as opposed to $1,681.55 per filer if it 
joins a PEO-sponsored MEP.
    \104\ These are estimated using an estimated audit cost of 
$13,000. If the lower end of the audit cost, $6,500 is assumed, then 
the estimated annual cost savings are $8,104 per filer (for an 
association MEP) or $8,165 per filer (for a PEO MEP). If the 
information provided by the commenter, $24,000, is assumed as the 
audit cost, then the estimated annual cost savings significantly 
increase to $25,429 per filer (for an association MEP) or $25,622 
per filer (for a PEO MEP).
---------------------------------------------------------------------------

    The extent to which small plans experience costs savings from 
joining a MEP may not be as large as discussed above.\105\ This is 
because small plans eligible for Form 5500-SF bear relatively less 
burden and generally are not required to conduct audits. By joining a 
MEP, however, those small plans would share the MEP's cost of audits 
and more complicated Form 5500 filings. For lower audit costs or for 
small plans not eligible to file Form 5500-SF, joining a MEP could 
yield higher savings.
---------------------------------------------------------------------------

    \105\ For example, assuming audit costs of $13,000, then a small 
plan eligible for Form 5500-SF would save $130 by joining an 
association MEP or $240 by joining a PEO MEP. If the lower-end audit 
cost of $6,500 is assumed, a small plan eligible for Form 5500-SF 
would save $195 by joining an association MEP or $256 by joining a 
PEO MEP. If the higher-end audit costs, $24,000 is assumed, a small 
plan eligible for Form 5500-SF would save $20 by joining an 
association MEP or $212 by joining a PEO MEP. In general, a small 
plan not eligible to file Form 5500-SF would experience higher cost 
savings than a small plan eligible to file Form 5500-SF.
---------------------------------------------------------------------------

    Similarly, it is less clear whether the self-employed will 
experience large reporting cost savings by joining a MEP. The 
Department estimates these potential cost savings by comparing the 
reporting costs of an employer that participates in a MEP rather than 
sponsoring its own plan. Several retirement savings options are already 
available for self-employed persons and most have minimal or no 
reporting requirements. For example, both SEP IRA and SIMPLE IRA plans 
are available for small employers and the self-employed, and neither 
option requires Form 5500 filings.\106\ Solo 401(k) plans are also 
available for self-employed persons, and they may be exempt from Form 
5500-EZ reporting requirement if the plans assets are less than 
$250,000.\107\ Thus, if self-employed individuals join a MEP, they will 
be unlikely to realize reporting costs savings. In fact, it is possible 
that their reporting costs will slightly increase, because the self-
employed would share reporting costs with other MEP participating 
employers that they otherwise would not incur.
---------------------------------------------------------------------------

    \106\ SEPs that conform to the alternative method of compliance 
in 29 CFR 2520.104-48 or 2520.104-49 do not have to file a Form 
5500; SIMPLEs do not have to file. For more detailed reporting 
requirements for SEPs and SIMPLE IRAs, see https://www.irs.gov/pub/irs-tege/forum15_sep_simple_avoiding_pitfalls.pdf; see also https://www.irs.gov/retirement-plans/retirement-plans-for-self-employed-people.
    \107\ Sometimes solo 401(k) is called as ``individual 401(k),'' 
or ``one-participant 401(k)'' or ``uni-401(k).'' For more 
information about solo-401(k) plans, including reporting 
requirements, see https://www.irs.gov/retirement-plans/one-participant-401k-plans. Because solo 401(k) plans do not cover any 
common law employees, they are not required to file an annual report 
under title I of ERISA, but must file a return under the Code. Such 
plans may be able to file a Form 5500-SF electronically to satisfy 
the requirement to file a Form 5500-EZ with the IRS.
---------------------------------------------------------------------------

    Compared to the alternative of sponsoring single-employer plans, 
joining a MEP may not save small employers and the self-employed as 
much as larger employers. Reporting and audit costs, however, are only 
a part of the costs associated with providing retirement plans. As 
discussed in other sections, MEPs provides participating employers with 
other benefits and cost savings. Employers will decide whether to join 
MEPs based on a broad array of factors.
    The Department's estimated reporting and audit cost savings is 
based on the assumption that all participating employers share costs 
equally regardless of their size. Thus, these estimated cost savings 
imply how much, on average, participating employers would save in 
reporting and audit costs. If a MEP adopts a fee arrangement where 
costs are distributed among participating employers according to their 
size, smaller employers could experience higher reporting cost savings 
than those estimated above. One commenter supported a tiered pricing 
arrangement over a level fee arrangement, making the assertion that 
tiered pricing leads to a more equitable distribution among 
participating employers.\108\
---------------------------------------------------------------------------

    \108\ See comment letter #47 Slavic 401K.
---------------------------------------------------------------------------

d. Reduced Bonding Costs
    The potential for bonding cost savings in MEPs merits separate 
attention. As noted above, ERISA section 412 and related regulations 
\109\ generally require every fiduciary of an employee benefit plan and 
every person who handles funds or other property of such plan to be 
bonded. ERISA's bonding requirements are intended to protect employee 
benefit plans from risk of loss due to fraud or dishonesty on the part 
of persons who handle plan funds or other property, generally referred 
to as plan officials. A plan official must be bonded for at least 10 
percent of the amount of funds he or she handles, subject to a minimum 
bond amount of $1,000 per plan with respect to which the plan official 
has handling functions. In most instances, the maximum bond amount that 
can be required under ERISA with respect to any one plan official is 
$500,000 per plan; however, the maximum required bond amount is 
$1,000,000 for plan officials of plans that hold employer 
securities.\110\
---------------------------------------------------------------------------

    \109\ 29 CFR 2550.412-1 and 29 CFR part 2580.
    \110\ See DOL Field Assistance Bulletin 2008-04, https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2008-04.
---------------------------------------------------------------------------

    Under the final rule, MEPs generally should enjoy lower bonding 
costs than would an otherwise equivalent collection of smaller, 
separate plans, for two reasons. First, it might be less expensive to 
buy one bond covering a large number of individuals who handle plan 
funds than a large number of bonds covering the same individuals 
separately or in smaller more numerous groups. Second, the number of 
people handling plan funds and therefore subject to ERISA's bonding 
requirement in the context of a MEP may be smaller than in the context 
of an otherwise equivalent collection of smaller, separate plans.
e. Increased Retirement Savings
    The various effects of this final rule should lead in aggregate to 
increased retirement savings. As discussed above, many workers likely 
will go from not having any access to a retirement plan to having 
access through a MEP. This has the potential to result in an increase 
in retirement savings, on average, for this group of workers. While 
some workers may choose not to participate, surveys indicate that a 
large number could. For a defined contribution pension plan, about 73 
percent of all workers with access take up the plan.\111\

[[Page 37537]]

Among workers whose salary tends to be in the lowest 10 percent of the 
salary range, this figure is about 40 percent.\112\ One reason that 
these take-up rates are relatively high is that many plans use 
automatic enrollment to enroll newly hired workers, as well as, 
sometimes, existing workers. Automatic enrollment is particularly 
prevalent among large plans; in 2017 about 74 percent of plans with 
1,000-4,999 participants use automatic enrollment, while only about 27 
percent of plans with 1-49 participants do.\113\ MEPs often allow 
participating employers to decide whether they want to use automatic 
enrollment and to select their other plan design features. It is 
unclear, however, whether employers participating in MEPs formed under 
this final rule will be more likely than employers sponsoring single-
employer DC plans to use automatic enrollment.
---------------------------------------------------------------------------

    \111\ These statistics apply to private industry. U.S. Bureau of 
Labor Statistics, National Compensation Survey, Employee Benefits in 
the United States (March 2018).
    \112\ Id.
    \113\ Plan Sponsor Council of America, ``61st Annual Survey of 
Profit Sharing and 401(k) Plans, Reflecting 2017 Plan Experience'' 
(2018), Table 111.
---------------------------------------------------------------------------

    Some workers may be saving in an IRA, either in an employer-
sponsored IRA, payroll deduction IRA, or on their own. If they begin 
participating in a MEP 401(k), they would have the opportunity to take 
advantage of higher contribution limits, and some might begin receiving 
employer contributions.
    In general, MEPs could offer participants a way to save for 
retirement with lower fees. In particular, the fees are likely to be 
lower than in most small plans and in retail IRAs. The savings in fees 
could result in higher investment returns and thus higher retirement 
savings.
f. Improved Portability
    In an economy where workers may change jobs many times over their 
career, portability of retirement savings is an important feature that 
can help workers keep track of their savings, retain tax-qualified 
status, and gain access to the investment options and fees that they 
desire. Some plan sponsors are not willing to accept rollovers from 
other qualified plans, which impedes portability. This is seen more 
often among small plan sponsors that do not want to confront the 
administrative burden and complexity associated with processing 
rollovers.\114\ While some MEPs may allow participating employers to 
choose whether to accept rollovers from other qualified plans, it is 
likely that more participating employers will be willing to do so since 
the MEP sponsor will handle the administration. It is also possible 
that some MEPs will be designed such that all participating employers 
accept rollovers. Moreover, MEPs could facilitate increased portability 
for employees that leave employment to work for another employer that 
adopted the same MEP.\115\ This might occur when the employers that 
adopted the MEP are in the same industry or are located in the same 
geographic area.
---------------------------------------------------------------------------

    \114\ A survey of plan sponsors indicates that in 2017, about 86 
percent of 401(k) plans with 1-49 participants accepted rollovers 
from other plans. Among larger plans, the figure is higher; for 
example, approximately 97 percent of plans with 1,000-4,999 
participants accept rollovers. The full details are more complex 
because many 401(k) plans responding yes accept rollover from some 
sources, such as another 401(k) plan, but not others, such as a 
defined benefit pension or an IRA. Id., Table 37.
    \115\ Paul M. Secunda, ``Uber Retirement,'' Marquette Law School 
Legal Studies Paper No. 17-1, (Jan. 2017).
---------------------------------------------------------------------------

g. Increased Labor Market Efficiency
    The increased prevalence of MEPs would allow small employers the 
opportunity to offer retirement benefits that are comparable to those 
provided by large employers. Since employees value retirement benefits, 
this development would tend to shift talented employees toward small 
businesses. Such a shift would make small businesses more competitive. 
The reallocation of talent across different sectors of the economy 
would increase efficiency.\116\
---------------------------------------------------------------------------

    \116\ John J. Kalamarides, Robert J. Doyle, and Bennett 
Kleinberg, ``Multiple Employer Plans: Expanding Retirement Savings 
Opportunities,'' Prudential (Feb. 2017).
---------------------------------------------------------------------------

h. Improved Data Collection
    This final rule also has the potential to improve the Department's 
data collection for purposes of ERISA enforcement. As noted above, the 
expansion of MEPs is likely to lead some employers who currently file 
their own Forms 5500 \117\ as participating employers in a MEP to 
belong to a MEP that files a single Form 5500. Since MEPs are usually 
large plans, they likely will have a much more detailed filing with the 
associated schedules including an audit report. This filing will tend 
to contain higher quality, more accurate data than the Department 
currently receives when a collection of participating employers files 
as single-employer plans. That is because (1) the required filing for 
plans with more than 100 participants requires more detail and (2) 
participating employers will be included in an audit when they were not 
previously. The same situation occurs when a small employer who is 
currently sponsoring a single-employer plan joins a large MEP in the 
future. When auditing becomes more prevalent, the increased oversight 
should help to prevent fraud and abuse. On the whole, the final rule 
will lead to more robust data collection for the Department to use in 
conducting its research, oversight, and enforcement responsibilities 
under ERISA.
---------------------------------------------------------------------------

    \117\ Although the participating employers are filing their own 
Forms 5500 (or Forms 5500-SF), the MEP may be providing Form 5500 
preparation and filing services for all the participating employers 
and be acting as a ``batch submitter'' and otherwise taking 
advantage of certain economies of scale.
---------------------------------------------------------------------------

    The Department also believes that this final rule will 
substantially improve the quality of information the Department 
collects. For example, the Department has encountered instances of 
participating employers in a MEP filing separate Forms 5500 that fail 
to account properly for each employer's financial and demographic 
information on a granular enough level to accurately report its 
proportion of the whole MEP. The Department has at times received 
identical filings for each participating employer within a MEP. This 
duplication can lead to an overstatement or understatement of 
participant counts, amount of assets, amount of fees, and other 
important financial and demographic data for the participating 
employers in some MEPs.

6. Costs

    The final rule does not impose any direct costs because it merely 
clarifies which persons may act as an ``employer'' within the meaning 
of section 3(5) of ERISA in sponsoring a MEP. The rule imposes no 
mandates but rather is permissive relative to baseline conditions. 
Concerns have been expressed, however, that MEPs could be vulnerable to 
abuse, such as fraud, mishandling of plan assets or charging excessive 
fees. Abuses might result from the fact that employers are not directly 
overseeing the plan. For example, employers acting as plan sponsors of 
single-employer plans can be effective fiduciaries as they have 
incentives to protect their plans. In the case of a MEP, however, an 
adopting employer will have limited fiduciary duties and may assume 
other participating employers are more thoroughly policing the plan. In 
fact, GAO found that some MEPs' marketing materials, and even MEP 
representatives, mislead employers about fiduciary responsibilities 
with claims that joining a MEP removes their fiduciary responsibility 
entirely.\118\ Less

[[Page 37538]]

monitoring provides an environment where abuses can occur. On the other 
hand, having multiple participating employers monitoring a MEP plan 
sponsor may actually lead to heightened protections for the collective.
---------------------------------------------------------------------------

    \118\ U.S. Government Accountability Office, GAO, ``12-665, 
``Private Sector Pensions--Federal Agencies Should Collect Data and 
Coordinate Oversight of Multiple Employer Plans,'' (Sept. 2012) 
(https://www.gao.gov/products/GAO-12-665).
---------------------------------------------------------------------------

    MEPs have the potential to build up a substantial amount of assets 
quickly, particularly where employers that already offer plans join 
MEPs and transfer existing retirement assets to the MEP, thus making 
them a target for fraud and abuse. Because the assets are used to fund 
future retirement distributions, such fraudulent schemes could be 
hidden or difficult to detect for a long period. A 2012 GAO report 
regarding federal oversight of data and coordination of MEPs discusses 
potential abuses by MEPs, such as charging excessive fees or 
mishandling plan assets.\119\ If MEPs are at greater risk for fraud and 
abuse than single-employer plans, and some employers who are currently 
sponsoring single-employer retirement plans decide to join a MEP more 
participants and their assets could be at greater risk of fraud and 
abuse. But single-employer DC plans are also vulnerable to these abuses 
and to mismanagement, and some MEPs may be more secure than some 
single-employer plans. The Department is not aware of any direct 
information indicating whether the risk for fraud and abuse is greater 
for MEPs than other plans, nor did it receive information on this topic 
in the comments submitted in response to the proposal. Many small 
employers have relationships based on trust with trade associations 
that the Department expects to sponsor MEPs under the final rule, and 
those associations have an interest in maintaining these trust 
relationships by ensuring that fraud does not occur in MEPs they 
sponsor. Nevertheless, employers exercise a fiduciary duty in choosing 
to begin and continue participating in a MEP and should exercise 
appropriate care, prudence, and loyalty to ensure that the MEP is 
sponsored and operated by high quality, reputable providers.
---------------------------------------------------------------------------

    \119\ Id.
---------------------------------------------------------------------------

    The Department does not have a basis to believe that there will be 
increased risk of fraud and abuse due to the final rule's PEO 
provisions. As stated earlier in the preamble, the final rule requires 
PEOs to have substantial control over the functions and activities of 
the MEP, as the plan sponsor (within the meaning of section 3(16)(B) of 
ERISA), the plan administrator (within the meaning of section 3(16)(A) 
of ERISA), and a named fiduciary (within the meaning of section 402 of 
ERISA). Requiring PEOs to act as MEP fiduciaries mitigates fraud 
concerns related to the expansion of PEO-sponsored plans, because the 
final rule ensures that PEOs will assume ERISA fiduciary status and 
bear all associated responsibilities.

7. Transfers

    Several transfers are possible as a result of this final rule. To 
the extent the expansion of MEPs leads employers that previously 
sponsored other types of retirement plans to terminate or freeze these 
plans and adopt a MEP, there may be a transfer between the employer and 
the employees, although the direction of the transfer is unclear. 
Additionally, if employers terminate or freeze other plans to enroll in 
a MEP, and if that MEP utilizes different service providers and asset 
types than the terminated plan, those different service providers would 
experience gains or losses of income or market share. Service providers 
that specialize in providing services to MEPs might benefit at the 
expense of other providers who specialize in providing services to 
small plans.
    The rule could also result in asset transfers if MEPs invest in 
different types of assets than small plans. For example, small plans 
tend to rely more on mutual funds, while larger plans have greater 
access to other types of investment vehicles such as bank common 
collective trusts and insurance company pooled separate accounts, which 
allow for specialization and plan specific fees. This movement of 
assets could see profits move from mutual funds to other types of 
investment managers.
    Finally, the Code generally gives tax advantages to certain 
retirement savings over most other forms of savings.\120\ Consequently, 
all else being equal, a worker who is saving money in tax qualified 
retirement savings vehicles generally can enjoy higher lifetime 
consumption and wealth than one who does not. The magnitude of the 
relative advantage generally depends on the worker's tax bracket, the 
amount contributed to the plan, the timing of contributions and 
withdrawals, and the investment performance of the assets in the 
account. Workers that do not contribute to a qualified retirement 
savings vehicle due to lack of access to a workplace retirement plan do 
not reap this relative advantage. This rule would likely increase the 
number of American workers with access to a tax-qualified workplace 
retirement plan, which would spread this financial advantage to some 
people who are not currently receiving it. If access to retirement 
plans and savings increase as a result of this final rule, a transfer 
will occur flowing from all taxpayers to those individuals receiving 
tax preferences as a result of new and increased retirement savings.
---------------------------------------------------------------------------

    \120\ Employer contributions to qualified pension plans and, 
generally, employee contributions made at the election of the 
employee through salary reduction are not taxed until distributed to 
the employee, and income earned on those amounts is not taxed until 
distributed. The tax expenditure for ``net exclusion of pension 
contributions and earnings'' is computed as the income taxes forgone 
on current tax-excluded pension contributions and earnings less the 
income taxes paid on current pension distributions.
---------------------------------------------------------------------------

8. Impact on the Federal Budget

    The effects of the rule on the federal budget are uncertain. 
Because the rule increases access to retirement plans, retirement 
savings likely also will increase. Given the tax deferral associated 
with retirement savings, tax revenues would likely decrease in the 
short run. The vast majority of dollars being contributed to defined 
contribution plans are pre-tax rather than Roth contributions. Pre-tax 
contributions include approximately 95 percent of participant 
contributions \121\ and all employer contributions. To the degree that 
Roth contributions may become more common in the future, there would be 
less short-term reduction in federal revenue.
---------------------------------------------------------------------------

    \121\ This estimate refers to 2014, the most recent year 
available. IRS, Statistics of Income Division, Form W-2 study, 
February 2018, Table 7.A.
---------------------------------------------------------------------------

    If people begin saving more for retirement, it is unclear if that 
would be accompanied by people consuming less, taking on more debt, 
saving less in nonretirement accounts, or saving less for retirement 
during future working years. Consequently, the long run net changes in 
consumption and investment, and the effect on the federal budget, are 
uncertain.

9. Uncertainty

    As discussed above, the Department expects this rule to expand 
workers' access to employment-based retirement plans by easing the 
burden of offering retirement benefits for employers--particularly 
small employers. However, the exact extent to which access to 
employment-based retirement plans will increase under this final rule 
is uncertain.
    Several reports suggest that, although important, employers may not 
consider offering retirement plans a priority as compared to other 
types of benefits. The most commonly offered benefit is paid leave, 
followed by health insurance; retirement plans rank third.\122\ This

[[Page 37539]]

order holds true for small employers, as well.\123\ Another survey of 
employers confirms that small employers offer health insurance more 
often than retirement plans.\124\ That study also suggests that company 
earnings and the number of employees affect the decision of whether or 
not to offer retirement plans. Employers that experience increases in 
earnings or the number of employees are more likely to offer retirement 
plans.\125\ The top reason provided for employers to start offering a 
retirement plan is an increase in business profits.\126\ Similarly, in 
another survey, employers not offering retirement plans cited ``the 
company is not big enough'' most frequently as the reason.\127\ 
Although this rule will make it easier and less costly for employers to 
offer a workplace retirement savings vehicle, these surveys suggest 
that small employers are not likely to adopt a MEP unless their 
business is in a strong financial position and generating sufficient 
revenue streams. Also, it can be quite challenging for a small employer 
or self-employed individual to determine which plan is most 
appropriate. Business owners must understand the characteristics and 
features of the available options in order to choose the most suitable 
plan. A discussion of some of these options and their features follows.
---------------------------------------------------------------------------

    \122\ Board of Governors of the Federal Reserve System, ``Report 
on the Economic Well-Being of U.S. Households in 2017'' (May 2018).
    \123\ The Pew Charitable Trusts, ``Employer Barriers to and 
Motivations for Offering Retirement Benefits,'' 2017.
    \124\ Transamerica Center for Retirement Studies, ``All About 
Retirement: An Employer Survey, 17th Annual Transamerica Retirement 
Survey'' (Aug. 2017).
    \125\ The Pew Charitable Trusts, ``Employer Barriers to and 
Motivations for Offering Retirement Benefits,'' 2017.
    \126\ Id.
    \127\ Transamerica Center for Retirement Studies, ``All About 
Retirement,'' 2017.
---------------------------------------------------------------------------

    SEP: Simplified Employee Pensions can be established by sole 
proprietors, partnerships, and corporations to provide retirement plan 
coverage to employees. SEPs must be offered to all employees who are at 
least 21 years old, were employed by the employer in three out of the 
last five years, and received compensation for the year ($600 for 2019 
\128\).
---------------------------------------------------------------------------

    \128\ IRS Notice 2018-83, 2018-47 I.R.B. 774 (11/19/2018).
---------------------------------------------------------------------------

    SEPs are completely employer funded and they cannot accept employee 
contributions.\129\ Each year the employer can set the level of 
contributions it wants to make, if any. The employer usually makes a 
contribution to each eligible employee's IRA (referred to as a SEP-IRA) 
that is equal to the same percentage of salary for each employee. The 
annual per-participant contribution cannot exceed the lesser of 25 
percent of compensation or $56,000 in 2019.\130\
---------------------------------------------------------------------------

    \129\ This rule does not apply to a SEP in effect on December 
31, 1996, if the SEP provided for pre-tax employee contributions 
(commonly referred to as a SARSEP) as of that date.
    \130\ IRS Notice 2018-83, 2018-47 I.R.B. 774 (11/19/2018).
---------------------------------------------------------------------------

    Participants can withdraw funds from their SEP-IRA at any time 
subject to federal income taxes. A 10 percent additional tax may apply 
if the employee is under age 59\1/2\. Participants cannot take loans 
from their SEP-IRAs.
    Generally, these plans are easy to set up; the business owner may 
use IRS Form 5305-SEP to establish the plan, and in some circumstances 
there are no set-up fees or annual maintenance charges. SEPs normally 
do not have to file a Form 5500.
    SIMPLE IRA Plan: The Savings Incentive Match Plan for Employees of 
Small Employers allows businesses with fewer than 100 employees to 
establish an IRA (referred to as a SIMPLE IRA) for each employee. The 
employer must make the plan available to all employees who received 
compensation of at least $5,000 in any prior two years and are 
reasonably expected to earn at least $5,000 in the current year. In 
2019, employees are allowed to make salary deferral contributions up to 
the lesser of 100 percent of compensation or $13,000.\131\ Employees 50 
or older may also make additional (``catch-up'') contributions of up to 
$3,000.\132\ The employer also must generally make a matching 
contribution dollar-for-dollar for employee contributions up to three 
percent of compensation (or a nonelective contribution set at two 
percent of compensation up to no more than $280,000 of compensation in 
2019).\133\
---------------------------------------------------------------------------

    \131\ Id.
    \132\ Id.
    \133\ Id.
---------------------------------------------------------------------------

    Participants can withdraw funds from their SIMPLE IRAs at any time 
subject to federal income taxes. A 25 percent additional tax may apply 
to withdrawals occurring within two years of commencing participation, 
if the participant is under age 59\1/2\. A 10 percent additional tax 
may apply after the two-year period, if the participant is under age 
59\1/2\. Participants cannot take loans from their SIMPLE IRAs.
    Similar to SEPs, SIMPLE IRA plans are easy to set up and have few 
administrative burdens. The employer may use IRS Form 5304-SIMPLE or 
5305-SIMPLE to set up the plan, and there is no annual filing 
requirement for the employer. Banks or other financial institutions 
handle most of the paperwork. Similar to SEPs, some companies offer to 
set up SIMPLE IRA plans with no set-up fees or annual maintenance 
charges.
    Payroll Deduction IRAs: An easy way for small employers to provide 
their employees with an opportunity to save for retirement is by 
establishing payroll deduction IRAs. Many people not covered by a 
workplace retirement plan could save through an IRA, but do not do so 
on their own. A payroll deduction IRA at work can simplify the process 
and encourage employees to get started. The employer sets up the 
payroll deduction IRA program with a bank, insurance company or other 
financial institution. Then each employee chooses whether to 
participate and if so, the amount of payroll deduction for contribution 
to the IRA. Employees are always 100 percent vested in (have ownership 
in) all the funds in their IRAs. Participant loans are not permitted. 
Withdrawals are permitted anytime, but they are subject to income tax 
(except for certain distributions from Roth IRAs and the portion of a 
distribution that constitutes the distribution of after-tax 
contributions from nondeductible IRAs). A 10 percent additional tax may 
apply if the employee is under age 59\1/2\.
    Employees' contributions are limited to $6,000 for 2019.\134\ 
Additional ``catch-up'' contributions of $1,000 per year are permitted 
for employees age 50 or over.\135\ Employees control where their money 
is invested and also bear the investment risk.
---------------------------------------------------------------------------

    \134\ Id.
    \135\ IRC section 219(b)(5)(B).
---------------------------------------------------------------------------

    Payroll deduction IRAs are not covered by ERISA if:
     No contributions are made by the employer;
     Participation is completely voluntary for employees;
     The employer's sole involvement in the program is to 
permit the IRA provider to publicize the program to employees without 
endorsement, to collect contributions through payroll deductions, and 
to remit them to the IRA provider; and
     The employer receives no consideration in the form of cash 
or otherwise, other than reasonable compensation for services actually 
rendered in connection with payroll deductions.\136\
---------------------------------------------------------------------------

    \136\ 29 CFR 2510.3-2(d).
---------------------------------------------------------------------------

    Solo 401(k): Self-employed individuals with no employees other than 
themselves and their spouses may establish a 401(k) plan, colloquially 
referred to as a solo 401(k). As an

[[Page 37540]]

employee, a self-employed individual may make salary deferrals up to 
the lesser of 100 percent of compensation or $19,000 in 2019.\137\ They 
also can make nonelective contributions up to 25 percent of 
compensation provided that, when added to any salary deferrals, the 
total contribution does not exceed the lesser of 100 percent of a 
participant's compensation or $56,000 \138\ (for 2019). In addition, 
those aged 50 or older can make additional (``catch-up'') contributions 
of up to $6,000.
---------------------------------------------------------------------------

    \137\ IRC section 402(g). IRS Notice 2018-83, 2018-47 I.R.B. 774 
(11/19/2018).
    \138\ IRC section 415(c). IRS Notice 2018-83, 2018-47 I.R.B. 774 
(11/19/2018).
---------------------------------------------------------------------------

    Withdrawals are permitted only upon the occurrence of a specified 
event (retirement, plan termination, etc.), and they are subject to 
federal income taxes. A 10 percent additional tax may apply if the 
participant is under age 59\1/2\. The plan may permit loans and 
hardship withdrawals.
    Solo 401(k) plans are more administratively burdensome than other 
types of plans available to small employers. A model form is not 
available to establish the plan. A Form 5500 must be filed when plan 
assets exceed $250,000.
    Credit for Pension Start-Up Costs: A tax credit is available for 
small employers to claim part of the ordinary and necessary costs to 
start a SEP, SIMPLE IRA, or 401(k) plan. To be eligible for the credit, 
an employer must have had no more than 100 employees who received at 
least $5,000 of compensation from the employer during the tax year 
preceding the first credit year. The credit is limited to 50 percent of 
the qualified cost to set up and administer the plan, up to a maximum 
of $500 per year for each of the first three years of the plan.\139\
---------------------------------------------------------------------------

    \139\ IRC section 45E(b).
---------------------------------------------------------------------------

    Saver's Credit: A nonrefundable tax credit for certain low- and 
moderate-income individuals, including self-employed individuals, who 
contribute to their plans is also available. The amount of the Saver's 
Credit is 50 percent, 20 percent, or 10 percent of the participant's 
contribution to an IRA, or an employer-sponsored retirement plan such 
as a 401(k), depending on the individual's adjusted gross income 
(reported on Form 1040 series return). The maximum annual contribution 
eligible for the credit is $2,000 ($4,000 if married filing 
jointly).\140\
---------------------------------------------------------------------------

    \140\ IRC section 25B.
---------------------------------------------------------------------------

    Discussion: The options discussed above may better serve an 
employer's needs than a MEP would in some circumstances. Some companies 
offer to set up solo 401(k) plans with no set-up fees.\141\ Despite 
these currently available options for self-employed workers, about 94 
percent of self-employed workers did not participate in retirement 
plans in 2013.\142\ Although these low levels of take-up with these 
other options create some uncertainty that this rule will persuade many 
self-employed individuals to join a MEP, this uncertainty alone is no 
basis to ignore MEPs' potential to improve the retirement preparedness 
of America's workers.
---------------------------------------------------------------------------

    \141\ Kerry Hannon, ``The Best Retirement Plans for the Self-
Employed.'' Forbes, (April 1, 2011).
    \142\ Copeland, ``Employment-Based Retirement Plan 
Participation, 2013.''
---------------------------------------------------------------------------

    SEP and SIMPLE IRA plans, for example, could meet the needs of many 
small employers. As discussed above, they are easy to set up and have 
low start-up and administrative costs. Furthermore, small employers can 
claim tax credits for part of the costs of starting up SEP or SIMPLE 
IRA plans, and certain employees may take advantage of the Saver's 
Credit. Despite these advantageous features, these plans did not gain 
much traction in the market. It is possible that, similar to existing 
options, MEPs will only be modestly attractive to small employers, 
resulting in only a small increase in retirement coverage.
    In addition to these plan options, there are other ways that 
existing small employers can offer retirement plans at low costs. For 
micro plans with assets less than $5 million, employers can use 
providers of bundled financial services that include both payroll and 
recordkeeping services on their 401(k) products. In 2016, about 69 
percent of plans with less than $1 million in assets used these bundled 
providers.\143\ Given that multiple low-cost options already exist for 
small employers, the Department is uncertain to what degree small 
employers and their workers would benefit from also having the option 
to join various MEPs, but it expects that the increased availability of 
plans will provide these employers and their workers with greater 
access to retirement plans.
---------------------------------------------------------------------------

    \143\ Cerulli Associates, U.S. Retirement Markets 2016 
(available at https://www.cerulli.com/vapi/public/getcerullifile?filecid=Cerulli-US-Retirement-Markets-2016-Information-Packet).
---------------------------------------------------------------------------

    Although this rule would ease the burden on employers, particularly 
small employers, in offering retirement plans for their workers, it is 
uncertain how many more employers would offer retirement plans to their 
workers and how many more employees would chose to participate in those 
retirement plans. To begin, workers employed by small employers not 
offering retirement plans tend to be younger workers, lower-paid 
workers, part-time workers, or immigrants,\144\ characteristics that at 
least one survey suggests reduce the lack of demand for retirement 
benefits.\145\ Indeed, one study found that large employers not 
sponsoring retirement plans tend to have similar characteristics among 
their employees: Higher proportions of part-time or part-year 
employees, younger employees, employees with lower earnings, and 
employees with less education.
---------------------------------------------------------------------------

    \144\ Copeland, ``Employment-Based Retirement Plan 
Participation, 2013.'' Constantijn W.A. Panis & Michael J. Brien, 
``Target Populations of State-Level Automatic IRA Initiatives,'' 
(August 28, 2015) (available at https://www.dol.gov/sites/default/files/ebsa/researchers/analysis/retirement/target-populations-of-state-level-automatic-ira-initiatives.pdf).
    \145\ The Pew Charitable Trusts, ``Employer Barriers to and 
Motivations for Offering Retirement Benefits,'' 2017.
---------------------------------------------------------------------------

    Several additional factors may influence employer participation in 
expanded or newly established MEPs. For large employers, even though 
the potential cost savings associated with filing Form 5500s and audit 
reports discussed earlier can be substantial, the savings may not be 
large enough to persuade them to join a MEP. Switching from an existing 
well-established plan to a MEP could be a difficult and costly 
procedure in the short term.
    In summary, there are many challenges and inherent uncertainties 
associated with efforts to expand the coverage of retirement plans, but 
this final rule would provide another opportunity for small employers 
and the self-employed to adopt a retirement savings plan. By reducing 
some of the burdens associated with setting up and administering 
retirement plans, this final rule should lower costs and encourage 
employers, particularly small employers, to establish a retirement 
savings plan for their workers.

10. Regulatory Alternatives

    As required by E.O. 12866, the Department considered various 
alternative approaches in developing this final rule, which are 
discussed below.
    Covering Other Types of MEPS: Executive Order 13847 called on the 
Department to consider whether businesses or organizations other than 
groups or associations of employers and PEOs should be able to sponsor 
a MEP by acting indirectly in the interest of participating employers 
in relation to the plan within the meaning of section 3(5) of ERISA. 
Consistent with the Executive Order, the Department specifically 
solicited public comments

[[Page 37541]]

at the proposed rule stage regarding whether, and under what 
circumstances, it should address so-called ``open MEPs'' or ``pooled 
employer plans.'' These arrangements cover employees of employers with 
no relationship other than their joint participation in the MEP. The 
solicitation asked commenters who believe these arrangements should be 
addressed in this or a future rulemaking to include a discussion of why 
they should be treated as one employee benefit plan with the meaning of 
title I of ERISA rather than a collection of separate employer plans 
being serviced by a commercial enterprise that provides retirement plan 
products and services.
    As discussed earlier in the preamble, more than half of the 
comments received on the proposed rule addressed this issue, and the 
vast majority supported a rule that would facilitate these 
arrangements. After reviewing the comments, the Department is persuaded 
that open MEPs deserve further consideration. The Department received a 
variety of different ideas and comments, some of which were 
contradictory. Given the wide range of possibilities, the Department 
does not believe it has developed a sufficient public record, or 
obtained sufficient data, to understand thoroughly the complete range 
of issues presented by these arrangements. Therefore, the Department 
has published a RFI elsewhere in today's Federal Register to develop a 
more robust public record and to obtain sufficient data to support a 
future rulemaking.
    The Department also solicited comments on whether the final rule 
should address the MEP status of so-called ``corporate MEPs,'' which 
are plans that cover employees of related employers that are not in the 
same controlled group or affiliated service group within the meaning of 
414(b), (c), and (m) of the Code.\146\ While using the commonality of 
interest provisions in this final rule to determine bona fide group or 
association status may not be the appropriate path for corporate MEPs, 
the Department recognizes that meaningful levels of common ownership 
may serve as an indicator of genuine economic or representational 
interests unrelated to the provision of benefits among the ownership 
group, such that one or more of the group members is acting 
``indirectly in the interest of'' the others within the meaning of 
ERISA section 3(5) in sponsoring a MEP for the group's participation.
---------------------------------------------------------------------------

    \146\ In Advisory Opinion 89-06A, the Department stated that it 
would consider a member of a controlled group that establishes a 
benefit plan for its employees and/or the employees of other members 
of the controlled group to be an employer within the meaning of 
ERISA section 3(5).
---------------------------------------------------------------------------

    On the record established thus far, however, the Department lacks a 
meaningful basis on which to determine the precise level of ownership 
that conclusively distinguishes these bona fide ownership groups from 
commercial enterprises in which members have nominal ownership levels 
that exist primarily or solely to market, distribute, or otherwise 
provide employee benefits to members. The Department, therefore, also 
has decided to explore the corporate MEP topic in the RFI.
    PEO Safe Harbor: The proposed rule contained two regulatory safe 
harbors for PEOs to determine whether they will be considered as 
performing substantial employment functions on behalf of their client-
employers. The first safe harbor provides that a PEO will satisfy the 
requirement if, among other things, it is a Certified PEO (CPEO) under 
the Code and meets at least two criteria in the list in paragraph 
(c)(2)(ii)(D) through (I) of the proposal. The second safe harbor is 
for PEOs that do not satisfy the CPEO safe harbor but meet five or more 
criteria from the list in paragraph (c)(2)(ii) of the proposal.
    In response to the proposed safe harbor, a commenter argued that 
the safe harbor standards should be the same for CPEOs and non-CPEOs 
and not more or less favorable for one business model rather than 
another. The commenter expressed concern that non-CPEOs would be unable 
to meet the ``substantial employer functions'' criteria in the proposed 
rule, and thus, unable to avail themselves of the non-CPEO safe harbor. 
The commenter viewed the proposal as favoring CPEOs and asserted that 
the Department should adopt a safe harbor that works for the entire PEO 
industry.
    As discussed earlier in the preamble, in response to the comment, 
the Department streamlined the safe harbor in the final rule by 
providing only one safe harbor that applies to CPEOs and non-CPEOs. The 
Department determined that the complexity inherent in the proposal's 
safe harbor could be reduced by combining the essential elements of the 
two safe harbors into a single safe harbor that both CPEOs and non-
CPEOs can rely on. The Department believes these changes will allow 
both CPEOs and non-CPEOs to meet the requirements of the safe harbor 
and provide optimum choices for employers that are considering joining 
MEPs sponsored by PEOs.
    Working Owner Definition: The final rule's definition of a working 
owner requires a person to work a certain number of hours (i.e., 20 
hours per week or 80 hours per month) or have wages or self-employment 
income above a certain level (i.e., wages or income must equal or 
exceed the working owner's cost of coverage to participate in the group 
or association's health plan if the individual is participating in that 
plan). In considering possible alternatives, the Department considered 
relying only on the hours worked threshold. However, the Department 
chose the formulation in this final rule (i.e., allowing either the 
hours worked threshold or the income level threshold), because it best 
clarified when a working owner could join a group or association 
retirement plan. Additionally, based on its expectation that certain 
groups and associations may offer both AHPs and MEPs, the Department 
chose this formulation because it parallels the working owner 
definition from the AHP Rule.

11. Paperwork Reduction Act

    The final rule is not subject to the requirements of the Paperwork 
Reduction Act of 1995 (PRA 95) (44 U.S.C. 3501 et seq.) because it does 
not contain a collection of information as defined in 44 U.S.C. 
3502(3).

12. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes 
certain requirements with respect to federal rules that are subject to 
the notice and comment requirements of section 553(b) of the 
Administrative Procedure Act (5 U.S.C. 551 et seq.) and that are likely 
to have a significant economic impact on a substantial number of small 
entities. Unless an agency determines that a final rule is not likely 
to have a significant economic impact on a substantial number of small 
entities, section 603 of the RFA requires the agency to present a final 
regulatory flexibility analysis (FRFA) of the final rule. The 
Department has determined that this final rule, which would clarify the 
persons that may act as an ``employer'' within the meaning of section 
3(5) of ERISA in sponsoring a MEP, is likely to have a significant 
impact on a substantial number of small entities. Therefore, the 
Department provides its FRFA of the final rule below.
a. Need for and Objectives of the Rule
    As discussed earlier in the preamble, the rule is necessary to 
expand access to MEPs, which could enable groups of private sector 
employers to participate in a collective retirement plan. MEPs meeting 
the requirements of the final rule are presented with an efficient

[[Page 37542]]

option to reduce the costs and complexity associated with establishing 
and maintaining defined contribution plans. This could encourage more 
plan formation and broader availability of affordable workplace 
retirement savings plans, especially among small employers and certain 
working owners. Thus, the Department intends and expects that the rule 
will deliver benefits primarily to the employees of many small 
businesses and their families including many working owners, as well as 
many small businesses themselves.
b. Affected Small Entities
    The Small Business Administration estimates that firms with 1-499 
employees plus nonemployer firms comprise 99.9 percent of U.S. 
businesses.\147\ The rule applies to firms of all sizes. Small 
businesses, including sole proprietors, can join MEPs as long as they 
are eligible to do so and as long as the MEP sponsor meets the 
requirements of the rule. The Department believes that the smallest 
firms, those with less than 100 employees, are most likely to be 
attracted to the reduced costs and fiduciary responsibilities that are 
associated with offering retirement benefits through a MEP. The 
Department also believes that many self-employed workers will find MEPs 
attractive. Approximately 8 million self-employed workers between ages 
21 and 70, representing six percent of all similarly aged workers, have 
no employees and usually work at least 20 hours per week. These self-
employed workers will become eligible to join MEPs under the rule.\148\
---------------------------------------------------------------------------

    \147\ The Small Business Administration, Office of Advocacy, 
2018 Small Business Profile. https://www.sba.gov/sites/default/files/advocacy/2018-Small-Business-Profiles-US.pdf. Last accessed on 
10/03/2018. The SBA reports that there are 5,881,267 business with 
1-499 employees. Many of these firms will have the option to join a 
MEP under this rule.
    \148\ DOL tabulations of the February 2019 Current Population 
Survey basic monthly data.
---------------------------------------------------------------------------

c. Impact of the Rule
    As stated above, by expanding MEPs, this final rule will provide a 
more affordable option for retirement savings coverage for many small 
businesses, thereby potentially yielding economic benefits for 
participating small businesses and their employees. Some advantages of 
an ERISA-covered retirement plan (including MEPs, SEP-IRAs, and SIMPLE 
IRAs) over IRA-based savings options outside the workplace include: (1) 
Higher contribution limits, (2) potentially lower investment management 
fees, especially in larger plans, (3) a well-established uniform 
regulatory structure with important consumer protections, including 
fiduciary obligations, recordkeeping and disclosure requirements, legal 
accountability provisions, and spousal protections, (4) automatic 
enrollment, and (5) stronger protections from creditors. At the same 
time, they provide employers with choice among plan features and the 
flexibility to tailor retirement plans to meet their business and 
employment needs.
    There are no new recordkeeping or reporting requirements for 
compliance with the rule. In fact, the recordkeeping and reporting 
requirements would likely decrease for most small employers under the 
rule. For example, if an employer joins a MEP meeting the requirements 
of the rule, it can save some costs associated with filing Form 5500 
and fulfilling audit requirements because a MEP is considered a single 
plan. Thus, one Form 5500 and audit report satisfies the reporting 
requirements. Accordingly, each participating employer would not need 
to file its own, separate Form 5500 and, for large plans or those few 
small plans that do not meet the small plan audit waiver, audit report. 
These reports are normally prepared by a combination of legal 
professionals, human resource professionals, and accountants.
    The Department considered several alternatives, such as whether to 
cover other types of MEPs, in developing its formulation of the PEO 
Safe Harbor. The ``Regulatory Alternatives'' section of the RIA above 
discusses these significant regulatory alternatives in more detail.
d. Duplicate, Overlapping, or Relevant Federal Rules
    The final rule would not conflict with any relevant federal rules. 
As discussed above, the rule will merely broaden the conditions under 
which the Department will view a group or association as acting as an 
``employer'' under ERISA for purposes of offering a MEP and make clear 
the conditions for PEO sponsorship. As such, the criteria could also 
result in more MEPs being treated consistently under the Code and title 
I of ERISA, including MEPs administered by PEOs for the benefit of the 
employees of their client employers, as described in IRS Rev. Proc. 
2002-21.

13. Congressional Review Act

    The final rule is subject to the Congressional Review Act (CRA) 
provisions of the Small Business Regulatory Enforcement Fairness Act of 
1996 (5 U.S.C. 801 et seq.) and will be transmitted to Congress and the 
Comptroller General for review. The rule is a ``major rule'' as that 
term is defined in 5 U.S.C. 804(2), because it is likely to result in 
an annual effect on the economy of $100 million or more.

14. Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4) requires each federal agency to prepare a written statement 
assessing the effects of any federal mandate in a proposed or final 
agency rule that may result in an expenditure of $100 million or more 
(adjusted annually for inflation with the base year 1995) in any one 
year by State, local, and tribal governments, in the aggregate, or by 
the private sector. For purposes of the Unfunded Mandates Reform Act, 
as well as Executive Order 12875, this final rule does not include any 
federal mandate that the Department expects will result in such 
expenditures by State, local, or tribal governments, or the private 
sector. This is because the rule merely clarifies which persons may act 
as an ``employer'' within the meaning of section 3(5) of ERISA in 
sponsoring a MEP and does not require any action or impose any 
requirement on the public sector or states.

15. Federalism Statement

    Executive Order 13132 outlines fundamental principles of 
federalism. E.O. 13132 requires federal agencies to follow specific 
criteria in forming and implementing policies that have ``substantial 
direct effects'' on the States, the relationship between the national 
government and States, or on the distribution of power and 
responsibilities among the various levels of government. Federal 
agencies promulgating regulations that have federalism implications 
must consult with State and local officials and describe the extent of 
their consultation and the nature of the concerns of State and local 
officials in the preamble to the final rule.
    In the Department's view, the final rule does not have federalism 
implications because it does not have a direct effect on the States, 
the relationship between the national government and the States, or on 
the distribution of power and responsibilities among various levels of 
government.

16. Executive Order 13771 Reducing Regulation and Controlling 
Regulatory Costs

    Executive Order 13771, titled Reducing Regulation and Controlling 
Regulatory Costs, was issued on January 30, 2017. This final rule is an 
E.O. 13771 deregulatory action, because it

[[Page 37543]]

provides critical guidance that expands small businesses' access to 
high quality retirement plans at lower costs than otherwise are 
available, by removing certain Department-imposed restrictions on the 
establishment and maintenance of MEPs under ERISA.

List of Subjects in 29 CFR Part 2510

    Employee benefit plans, Pensions.

    For the reasons stated in the preamble, the Department of Labor is 
amending 29 CFR part 2510 as follows:

PART 2510--DEFINITIONS OF TERMS USED IN SUBCHAPTERS C, D, E, F, G, 
AND L OF THIS CHAPTER

0
1. The authority citation for part 2510 is revised to read as follows:

    Authority: 29 U.S.C. 1002(1), 1002(2), 1002(3), 1002(5), 
1002(16), 1002(21), 1002(37), 1002(38), 1002(40), 1002(42), 1031, 
and 1135; Secretary of Labor's Order No. 1- 2011, 77 FR 1088 (Jan. 
9, 2012); Sec. 2510.3-101 and 2510.3-102 also issued under sec. 102 
of Reorganization Plan No. 4 of 1978, 5 U.S.C. App. At 237 (2012), 
(E.O. 12108, 44 FR 1065 (Jan. 3, 1979) and 29 U.S.C. 1135 note. Sec. 
2510.3-38 is also issued under sec. 1, Pub. L. 105-72, 111 Stat. 
1457 (1997).


0
2. Section 2510.3-3 is amended by revising paragraph (c) introductory 
text to read as follows:


Sec.  2510.3-3  Employee benefit plan.

* * * * *
    (c) Employees. For purposes of this section and except as provided 
in Sec.  2510.3-5(e) and Sec.  2510.3-55(d):
* * * * *

0
3. Section 2510.3-5 is amended by revising the section heading to read 
as follows:


Sec.  2510.3-5  Definition of Employer--Association Health Plans.

* * * * *

0
4. Section 2510.3-55 is added to read as follows:


Sec.  2510.3-55  Definition of Employer--Association Retirement Plans 
and Other Multiple Employer Pension Benefit Plans.

    (a) In general. The purpose of this section is to clarify which 
persons may act as an ``employer'' within the meaning of section 3(5) 
of the Act in sponsoring a multiple employer defined contribution 
pension plan (hereinafter ``MEP''). The Act defines the term ``employee 
pension benefit plan'' in section 3(2), in relevant part, as any plan, 
fund, or program established or maintained by an employer, employee 
organization, or by both an employer and an employee organization, to 
the extent by its express terms or as a result of surrounding 
circumstances such plan, fund, or program provides retirement income to 
employees or results in a deferral of income by employees for periods 
extending to the termination of covered employment or beyond. For 
purposes of being able to establish and maintain an employee pension 
benefit plan within the meaning of section 3(2), an ``employer'' under 
section 3(5) of the Act includes any person acting directly as an 
employer, or any person acting indirectly in the interest of an 
employer in relation to an employee benefit plan. A group or 
association of employers is specifically identified in section 3(5) of 
the Act as a person able to act directly or indirectly in the interest 
of an employer, including for purposes of establishing or maintaining 
an employee benefit plan. A bona fide group or association of employers 
(as defined in paragraph (b) of this section) and a bona fide 
professional employer organization (as described in paragraph (c) of 
this section) shall be deemed to be able to act in the interest of an 
employer within the meaning of section 3(5) of the Act by satisfying 
the criteria set forth in paragraphs (b) and (c) of this section, 
respectively.
    (b)(1) Bona fide group or association of employers. For purposes of 
title I of the Act and this chapter, a bona fide group or association 
of employers capable of establishing a MEP shall include a group or 
association of employers that meets the following requirements:
    (i) The primary purpose of the group or association may be to offer 
and provide MEP coverage to its employer members and their employees; 
however, the group or association also must have at least one 
substantial business purpose unrelated to offering and providing MEP 
coverage or other employee benefits to its employer members and their 
employees. For purposes of satisfying the standard of this paragraph 
(b)(1)(i), as a safe harbor, a substantial business purpose is 
considered to exist if the group or association would be a viable 
entity in the absence of sponsoring an employee benefit plan. For 
purposes of this paragraph (b)(1)(i), a business purpose includes 
promoting common business interests of its members or the common 
economic interests in a given trade or employer community and is not 
required to be a for-profit activity;
    (ii) Each employer member of the group or association participating 
in the plan is a person acting directly as an employer of at least one 
employee who is a participant covered under the plan;
    (iii) The group or association has a formal organizational 
structure with a governing body and has by-laws or other similar 
indications of formality;
    (iv) The functions and activities of the group or association are 
controlled by its employer members, and the group's or association's 
employer members that participate in the plan control the plan. Control 
must be present both in form and in substance;
    (v) The employer members have a commonality of interest as 
described in paragraph (b)(2) of this section;
    (vi) The group or association does not make plan participation 
through the association available other than to employees and former 
employees of employer members, and their beneficiaries; and
    (vii) The group or association is not a bank or trust company, 
insurance issuer, broker-dealer, or other similar financial services 
firm (including a pension recordkeeper or third-party administrator), 
or owned or controlled by such an entity or any subsidiary or affiliate 
of such an entity, other than to the extent such an entity, subsidiary 
or affiliate participates in the group or association in its capacity 
as an employer member of the group or association.
    (2) Commonality of interest. (i) Employer members of a group or 
association will be treated as having a commonality of interest if 
either:
    (A) The employers are in the same trade, industry, line of business 
or profession; or
    (B) Each employer has a principal place of business in the same 
region that does not exceed the boundaries of a single State or a 
metropolitan area (even if the metropolitan area includes more than one 
State).
    (ii) In the case of a group or association that is sponsoring a MEP 
under this section and that is itself an employer member of the group 
or association, the group or association will be deemed for purposes of 
paragraph (b)(2)(i)(A) of this section to be in the same trade, 
industry, line of business, or profession, as applicable, as the other 
employer members of the group or association.
    (c)(1) Bona fide professional employer organization. A professional 
employer organization (PEO) is a human-resource company that 
contractually assumes certain employer responsibilities of its client 
employers. For purposes of title I of the Act and this chapter, a bona 
fide PEO is capable of establishing a MEP. A bona fide PEO is an 
organization that meets the following requirements:
    (i) The PEO performs substantial employment functions on behalf of 
its client employers that adopt the MEP, and maintains adequate records 
relating to such functions;

[[Page 37544]]

    (ii) The PEO has substantial control over the functions and 
activities of the MEP, as the plan sponsor (within the meaning of 
section 3(16)(B) of the Act), the plan administrator (within the 
meaning of section 3(16)(A) of the Act), and a named fiduciary (within 
the meaning of section 402 of the Act), and continues to have employee-
benefit-plan obligations to MEP participants after the client employer 
no longer contracts with the organization.
    (iii) The PEO ensures that each client employer that adopts the MEP 
acts directly as an employer of at least one employee who is a 
participant covered under the MEP; and
    (iv) The PEO ensures that participation in the MEP is available 
only to employees and former employees of the PEO and client employers, 
employees and former employees of former client employers who became 
participants during the contract period between the PEO and former 
client employers, and their beneficiaries.
    (2) Safe harbor criteria for substantial employment functions. For 
purposes of paragraph (c)(1)(i) of this section, whether a PEO performs 
substantial employment functions on behalf of its client employers is 
determined on the basis of the facts and circumstances of the 
particular situation. As a safe harbor, a PEO shall be considered to 
perform substantial employment functions on behalf of its client-
employers that adopt the MEP if it meets the following criteria with 
respect to each client-employer employee that participates in the MEP--
    (i) The PEO assumes responsibility for and pays wages to employees 
of its client-employers that adopt the MEP, without regard to the 
receipt or adequacy of payment from those client employers;
    (ii) The PEO assumes responsibility for and reports, withholds, and 
pays any applicable federal employment taxes for its client employers 
that adopt the MEP, without regard to the receipt or adequacy of 
payment from those client employers;
    (iii) The PEO plays a definite and contractually specified role in 
recruiting, hiring, and firing workers of its client-employers that 
adopt the MEP, in addition to the client-employer's responsibility for 
recruiting, hiring, and firing workers. A PEO is considered to satisfy 
this standard if it recruits, hires, and fires, assumes responsibility 
for recruiting, hiring, and firing, or retains the right to recruit, 
hire, and fire workers of its client-employers that adopt the MEP, in 
addition to the client-employer's responsibility for recruiting, 
hiring, and firing workers; and
    (iv) The PEO assumes responsibility for and has substantial control 
over the functions and activities of any employee benefits which the 
service contract may require the PEO to provide, without regard to the 
receipt or adequacy of payment from those client employers for such 
benefits.
    (d) Dual treatment of working owners as employers and employees. 
(1) A working owner of a trade or business without common law employees 
may qualify as both an employer and as an employee of the trade or 
business for purposes of the requirements in paragraph (b) of this 
section, including the requirement in paragraph (b)(1)(ii) of this 
section that each employer member of the group or association adopting 
the MEP must be a person acting directly as an employer of one or more 
employees who are participants covered under the MEP, and the 
requirement in paragraph (b)(1)(vi) of this section that the group or 
association does not make participation through the group or 
association available other than to certain employees and former 
employees and their beneficiaries.
    (2) The term ``working owner'' as used in this paragraph (d) means 
any person who a responsible plan fiduciary reasonably determines is an 
individual:
    (i) Who has an ownership right of any nature in a trade or 
business, whether incorporated or unincorporated, including a partner 
or other self-employed individual;
    (ii) Who is earning wages or self-employment income from the trade 
or business for providing personal services to the trade or business; 
and
    (iii) Who either:
    (A) Works on average at least 20 hours per week or at least 80 
hours per month providing personal services to the working owner's 
trade or business, or
    (B) In the case of a MEP described in paragraph (b) of this 
section, if applicable, has wages or self-employment income from such 
trade or business that at least equals the working owner's cost of 
coverage for participation by the working owner and any covered 
beneficiaries in any group health plan sponsored by the group or 
association in which the individual is participating or is eligible to 
participate.
    (3) The determination under this paragraph (d) must be made when 
the working owner first becomes eligible for participation in the 
defined contribution MEP and continued eligibility must be periodically 
confirmed pursuant to reasonable monitoring procedures.
    (e) Severability. (1) If any provision of this section is held to 
be invalid or unenforceable by its terms, or as applied to any person 
or circumstance, or stayed pending further agency action, the provision 
shall be construed so as to continue to give the maximum effect to the 
provision permitted by law, unless such holding shall be one of 
complete invalidity or unenforceability, in which event the provision 
shall be severable from this section and shall not affect the remainder 
thereof.
    (2) Examples. (i) If any portion of paragraph (b)(1)(i) of this 
section (containing the substantial business purpose requirement) is 
found to be void in a manner contemplated by paragraph (e)(1) of this 
section, then the whole of paragraph (b)(1)(i) of this section shall be 
construed as follows: ``The group or association must be a viable 
entity in the absence of offering and providing MEP coverage or other 
employee benefits to its employer members and their employees.''
    (ii) If any portion of paragraph (d) of this section (containing 
the ``working owner'' provision) is found to be void in a manner 
contemplated by paragraph (e)(1) of this section, such a decision does 
not impact the ability of a bona fide group or association to meet the 
``commonality of interest'' requirement in paragraph (b)(2) of this 
section by being located in the same geographic locale.

    Signed at Washington, DC, on July 22, 2019.
Preston Rutledge,
Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.
[FR Doc. 2019-16074 Filed 7-29-19; 8:45 am]
BILLING CODE 4510-29-P