DOL issues RFI on a possible ERISA class exemption for PEP/MEP plans

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Eversheds Sutherland (US) LLPOn June 18, 2020, the US Department of Labor (DOL) published a request for information (RFI), in advance of its potential proposal of a class exemption (PTE) providing relief for ERISA prohibited transactions arising in the operation of pooled employer plans (PEPs) and multiple employer plans (MEPs). By way of background:

  • Internal Revenue Code section 413 has long provided for tax-qualified retirement plans maintained for employees of unrelated employers, i.e., MEPs.
  • Traditionally, DOL’s position has been that “closed” MEPs, sponsored by employer groups or associations or professional employer organizations on behalf of employers with a nexus to each other, may be treated as a single “plan” for ERISA purposes, which offers administrative and compliance efficiencies for the plan. “Open” MEPs, where the employers joining the plan are otherwise unrelated, were not strictly prohibited but were obliged to structure their operational and compliance practices on the basis that the arrangement constituted a series of separate “plans” for ERISA purposes.
  • In the interest of expanding the coverage of the US retirement system, which at the end of 2019 covered just over 60% of the American workforce, DOL and the Treasury Department have for a number of years been interested in expanding the reach of MEPs. In the current Administration, this interest was publicly expressed in an executive order issued August 2018. In July 2019, DOL simultaneously issued a final regulation on closed MEPs, and published an RFI inquiring whether the regulation should be amended to facilitate open MEPs.
  • The SECURE Act, enacted in December 2019, advanced this policy initiative by amending ERISA and the Code to provide for a new type of open MEP to be known as a PEP, effective in 2021. A PEP is a defined contribution plan that (1) provides that a “pooled plan provider” is the named fiduciary of the plan responsible for the general administration of the plan, (2) designates trustees to be responsible for collecting contributions to the plan, (3) provides that employers and participants are not subject to unreasonable restrictions, fees, or penalties in connection with ceasing participation in the plan, and (4) meets certain other requirements. Under the statute, the employers participating in a PEP do not need to be related by a common interest or in any other way. A pooled plan provider can be any person who registers with the IRS and Department of Labor and agrees to perform all of the actions required of it under ERISA, the Code and applicable guidance. There are no other explicit limitations on who may serve as a pooled plan provider. Employers participating in the PEP remain responsible for the selection and monitoring of the pooled plan provider and any other named fiduciary of the plan.

In its new RFI, DOL advised that is considering the issuance on its own motion of an ERISA class PTE covering PEPs and/or MEPs, and raised a number of questions that bear on the need for and scope of any such relief. The questions fell into three categories, and generally covered:

Pooled plan providers and MEP sponsors

  1. What types of entities are likely to act as pooled plan providers?
  2. What types of business models will pooled plan providers adopt?
  3. What if any conflicts of interest will pooled plan providers have?
  4. How will pooled plan providers and their affiliates be compensated, and what ERISA prohibited transactions will those structures raise?
  5. Will existing statutory or class PTEs provide the relief necessary for pooled plan providers, or is additional relief needed?
  6. Should any additional PTE be crafted for all pooled plan providers, or targeted to specific categories of pooled plan providers?
  7. To the extent the respondent does not believe additional relief is necessary, why?
  8. Do similar issues arise in the operation of closed MEPs and do they have a similar need for additional prohibited transaction relief?

Plan investments

  1. What plan investment options are anticipated for PEPs and MEPS?
  2. What role will pooled plan providers and MEP sponsors serve with respect to these investment options?

Employers in the PEP or MEP

  1. Are there estimates of the number/types of employers and employees likely to be covered by PEPs and MEPs?
  2. If larger and smaller employers join a single program, will additional prohibited transaction issues result?
  3. Do PEPs and MEPs create greater exposure to prohibited transactions in connection with investments in employer securities or real property?
  4. In the case of a noncompliant employer moving from a PEP or MEP to another plan or IRA, will prohibited transactions arise?

DOL plainly has an important role to play in implementing the viable PEP system envisioned by Congress, so this RFI is a welcome development. Because time is of the essence given the 2021 effective date of the SECURE Act PEP provisions, responses to the RFI are due July 20, 2020.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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