Multiple-employer plans for small businesses

By Michael D. Koppel, CPA, PFS, CITP, MBA
Retired Partner
December 1, 2020


Editor: Marcy Lantz, CPA

Jill owns a hardware store on Main Street in a small town. The store to her left is a women’s clothing store owned by Mary. To her right is a sporting goods store owned by James. Each business is an S corporation and has five full-time employees. Jill, Mary, and James are not related.

Jill, Mary, and James were having breakfast one morning with Mary’s cousin, John, who is a CPA. They told him that they would love to be able to offer their employees a retirement plan but that the fees were too expensive. John asked if they had explored the option of a multiple-employer plan (MEP). He let them know that in July 2019, the U.S. Department of Labor (DOL) finalized a rule that expands access to affordable quality retirement saving options for Americans working in small and midsize businesses (84 Fed. Reg. 37508 (July 31, 2019)). The new rule clarifies the circumstances under which an employer group or association or a professional employer organization may join together to sponsor a defined contribution retirement plan for its members.

According to the DOL, MEPs will allow small and midsize businesses to obtain the economies of scale for administrative costs and investment choices currently enjoyed by large employers and lower the costs and decrease the regulatory burden and fiduciary liability of providing retirement benefits for these businesses. This item discusses some of the conditions set out in the rule for an employer group or association to join together to establish a MEP and who can be covered under the plan.

Purpose of the association

A group or association of employers must have “at least one substantial business purpose unrelated to offering and providing MEP coverage” (84 Fed. Reg. at 37530). The rule goes on to explain 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. 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.

While this sounds onerous, the preamble to the rule explains that this can include 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. However, an entity that exists solely to sponsor a MEP would not qualify.

Groups or associations of individuals

While there was substantial discussion regarding who or what can be a participating member of the MEP, the DOL determined that it did not have the authority under the Employee Retirement Income Security Act of 1974 (ERISA) to define “employer” and “group or association of employers” to broadly extend to arrangements established to provide benefits outside the employment context and without regard to the members’ status as employers. Thus, the ruling follows ERISA Section 3(5), and membership is limited to employers and working owners such as sole proprietors and other self-employed individuals.

Formal organizational structure

The rule basically indicates that the MEP must have a formal organizational structure with a governing body with all its requirements. Thus, the organization must have bylaws and similar indications of formality appropriate for the legal form in which the group or association operates.

Participating employer control over the group or association

The members of the MEP must demonstrate a degree of control over the organization. The DOL did not provide a bright-line test in this regard. Rather it indicated that the members do not have to be involved in the day-to-day operation but do need to demonstrate a degree of control. The DOL did, however, provide a list of items it would consider.

For example:

  • Do the members meet regularly to determine directors, officers, trustees, or others in control?
  • Do the members have the authority to remove those chosen above with or without cause?
  • Do the members have the authority and opportunity to approve or veto various items regarding the formation, design, amendment, and termination of the plan, for example, material amendments to the plan, including changes in coverage, benefits, and premiums?
Commonality of interest

This provision is satisfied by the members’ either being in the same trade, industry, line of business, or profession, or maintaining their principal places of business in a region that does not exceed the boundaries of the same state, or in the same metropolitan area (even if the metropolitan area includes more than one state).

Eligible participants in the plan

Only employees of a current employer member or a working owner member of the group or association, former employees of a current employer member of the group or association who became entitled to coverage under a group health plan when the former employee was an employee of the employer, and beneficiaries of such individuals (e.g., spouses and dependent children) can be covered by any of the benefits of the MEP. Working owners who no longer qualify as members of the group or association and their beneficiaries cannot participate in the group health plan.

A viable option for small businesses

As discussed above, a group of employers and working owners must meet a host of requirements to establish a MEP under the DOL rule. However, the very real benefits that can be obtained by having a group or association MEP should encourage businesses that have the required commonality of interest to explore the possibility.

This article was originally published in the AICPA “Tax Adviser” on December 1, 2020.

Spread the Word

Recent Post

Contact Us Today!

Discover how we can give you the power to do more.

Scroll to Top