Multiple Employer Plan (MEP) Retirement Plan Rules & Issues.

Multiple Employer Plan (MEP) Retirement Plan Rules & Issues. Alson R. Martin Lathrop & Gage LLP 10851 Mastin Boulevard Suite 1000 Overland Park, KS 66210-1669 amartin@lathropgage.com A. Overview. MEP Defined. A multiple employer plan ("MEP") is a retirement plan adopted by two or more employers who are unrelated for income tax purposes (that is, not members of a controlled or affiliated service group, which are treated as if they are one employer). It is not a multi-employer plan, which is a union plan that is collectively bargained. Nor is a MEP a Multiple Employer Welfare Arrangement (MEWA), which provides health and welfare benefits to employees of two or more unrelated employers who are not parties to bona fide collective bargaining agreements. Those welfare arrangements are subject to a separate set of rules from those applicable to retirement plans. Despite the fact that MEP retirement plans have existed since the 1950s, proper MEP operation and compliance remains uncertain due to a lack of guidance from the Internal Revenue Service ("Service" or IRS ) and the Department of Labor ("DOL"). Furthermore, the guidance that has been issued by the Service and the DOL conflicts in certain instances. MEP Types. There are three types of MEPs. The first type of MEP is a retirement plan sponsored by a Professional Employer Organization ( PEO ) that is adopted by the PEO s clients; the second is a MEP sponsored by an industry or trade group to be adopted by the group s members; and the third is a MEP co-sponsored by the participating employers who have no relationship or connection to each other other than participating in a common plan (the "open" MEP). The legal status of the first and third type is uncertain due to the DOL commonality requirement, discussed below. Possible Benefits. The possible benefits of a MEP to an employer that are often touted by MEP promoters include the elimination of most plan sponsor functions, such as an annual plan audit and Form 5500 filing, and some plan fiduciary functions, such as choosing which investment options will be available to plan participants. Generally, MEP adopting employers no longer file a Form 5500, maintain a fidelity bond, or bear the responsibility for ERISA 408(b)(2) compliance with respect to covered service provider disclosures responsible plan fiduciaries first effective in 2012. These functions are generally handled by the MEP plan sponsor, not the adopting employer. For some employers, this benefit is inconsequential. For others, the desire to let third parties run the plan can be more important than either the audit relief or fiduciary risk mitigation. Risks. However, there are several risks and realities that must be understood by employer that is making a decision whether to adopt a MEP retirement plan. First, the DOL has imposed a commonality requirement on employers adopting welfare plans. If the DOL were to apply this 3072604v1 1

requirement to MEPs, failure to meet the requirement would mean that the plans are separate plans, which would require each plan to meet the various notice and reporting requirements, which it would fail to do since it was relying on the MEP sponsor, which would expose it to various penalties. Second, if either the IRS or the DOL decides the plan is not a MEP, each can fine the employer for not filing 5500s for their plan, even if the MEP has filed a 5500 for all of their plans. The failure to file penalties are very substantial. 1 Third, if one employer violates the qualified retirement plan rules, such as the top heavy or vesting rules, the entire plan and all the adopting employers can face plan disqualification or nondeductible monetary sanctions on the employers. Reg. 1.413-2(a)(3)(iv). I have been in an audit with a national coop, whose local coops adopted it multiple employer plan, and we settled it for a penalty in six figures. The initial proposed penalty was over $1 million. The existence of the Service s Employee Plans Compliance Resolution System, which is available for plan sponsors to voluntarily correct plan failures in the audit and non-audit context, makes MEP plan disqualification is much less likely, but only if the employers agree to pay nondeductible penalties. 2 Fourth, the adopting employer remains responsible for some ERISA requirements that cannot be eliminated, as discussed in more detail below. Fifth, the MEP sponsor must cover its own employees in the plan, or the IRS s likely to find the MEP invalid. Sixth, when an employer wants to leave the MEP and have its own plan, its participating employees can only be paid their share of plan assets if there is a payment event, which this is not. However, a spin off may be possible under Code 414(l). MEP Alternative - Each employer sets up a separate plan (with the assistance of a coordinator. The coordinator provides administrative services. A Master Trust is used for investment and to hold participant funds. The setup works. IRS Determination Letter. If one or more participating employers wants its own individual IRS determination letter, a separate fee schedule applies, based on the number of Forms 5300 being filed. A Form 5300 is filed for the plan as a whole, and an additional Form 5300 is filed for each participating employer requesting a separate determination letter. See section 10.02(2) of the general determination letter procedure, Rev. Proc. 2011-6. Thus, for purposes of the user fee, the 1 Plan administrators who fail to file an annual report may be assessed a penalty by the DOL of $300 per day, up to $30,000 per year. The IRS non-filing penalty is $1100 a day up to $15,000 per year. The penalties continue to run until a complete report is filed. The penalty must be paid by the employer. 2 Rev. Rul. 2008-50, 10.12. The plan administrator of a MEP, rather than any contributing or participating employer, must request consideration of the plan under the Service s correction programs, and the request must be made with respect to the entire MEP, rather than a portion of the MEP affecting any particular employer. Id. In some instances, however, the plan administrator of the MEP may choose to have the correction compliance fee calculated separately for each employer based on the assets attributable to that employer, rather than being attributable to the assets of the entire plan. Id. 3072604v1 2

number of Forms 5300 being filed includes the Form 5300 being filed by the primary sponsor. Each participating employer that wishes a determination letter files a separate Form 5300, completed through line 8, a completed adoption agreement, if applicable, and then may complete the coverage questions and request determinations for which Schedule Q is needed. If the multiple employer plan is adopted by other employers after the initial submission, the normal determination letter application fees would apply to a determination letter requested by such employer. What Responsibilities Remain For the MEP Employer? Those remaining employer responsibilities include: The decision to adopt or terminate participation in the MEP. The responsibility for selecting and monitoring the MEP sponsor and perhaps the plan investments unless those are handled by a separate named fiduciary. The employer would be responsible for the prudent selection and monitoring the performance of that fiduciary. An employer retains sufficient discretionary authority or control respecting management of a plan to be a fiduciary where the employer had the authority, exercised through its board of directors, to appoint and to remove the trustee, to amend the terms of the plan, and to establish the amount of employer contributions to the plan. Bradshaw v. Jenkins, 5 EBC 2754 (DC WA 1984). Moreover, a corporate employer, by virtue of its power to amend the plan, has the power to select a new insurance company and a new administrator to administer the plan. This was sufficient to make the employer a fiduciary. Ed Miniat Inc v. Globe Life Insurance Group Inc, 805 F2d 732 (7th Cir. 1986), cert den 482 US 915 (1987). Determining if MEP employers meet the DOL's commonalty rule, if required of MEP retirement plans. The need to make timely and accurate plan contributions. Plan design decisions, such as the level of match. Distribution to participants of required notices and information unless handled by the MEP plan sponsor. Communication and enrollment assistance for participants unless handled by the MEP plan sponsor. Mechanics Of Adoption Of MEP; Restatement vs Termination. Where an employer has an existing plan and wants to transfer its assets to a MEP, this is not a classic merger of plans since the employer's plan continues to exist in the multiple employer context. Likely, where the employer has an existing plan, adoption of a MEP may be treated merely a restatement of the single-employer plan to become a member of the multiple employer plan, but the fact that the MEP sponsor and EIN are different may require a termination or a spin-off under Code 414(l). If the employer's plan and the MEP are a 401(k) plan, a termination of the employer's single employer plan will not allow payment to participants. So the employer will be required to continue its plan or do a spin-off, if the MEP will accept its plan assets in that type of procedure. B. Questions To Ask When Selecting a Multiple Employer Plan. Will existing plan features must be changed, if any? 3072604v1 3

Do the employers meet the DOL's commonality requirement (or has the DOL disavowed that position for retirement plans)? See DOL Adv. Op. 2001-4. How much will the annual audit expense be? CPAs advise that a major cost of the plan audit arises from testing the compensation, deferrals, and other census derived compliance components of the plan s administration. Where each employer participating in the MEP does its own payroll (or does it through its payroll service), there is no commonality of payroll, so it is doubtful that there are substantial economies to an audit for such a MEP. Is the plan trying to apply the audit once every 4 year rule that only applies to multiemployer and not MEP plans? Who is handling the administration (TPA) work, fiduciary oversight, and plan operations? What are the credentials and MEP expertise of the various parties involved with the MEP? The adopting employer has the duty to prudently select and monitor. How long have the parties to the MEP been involved with MEPs? Is there an ERISA attorney advising the MEP and maintaining the plan document? If so, what is their background specific to MEPs? How are all of the parties paid? Are there potential conflicts of interest or prohibited transactions? If you wish to retain your current adviser within an MEP arrangement, are they adviserfriendly, holding themselves accountable and transparent to the adopter s adviser? Is there a proper separation of the roles and ownership structure of the MEP s plan sponsor, independent fiduciary, and contracted service providers? What measures does the MEP take to terminate noncompliant adopting employers that could negatively affect the entire MEP? Does the MEP contract allow them to unilaterally push out adopters with compliance problems? C. Participating employers treated as single employer for certain purposes. IRC 413(c) allows the participating employers in a multiple employer plan to be treated as a single employer for certain purposes, even though these employers are not related under any of the related employer definitions under IRC 414(b), (c), (m) or (o). 1. Eligibility. In IRC 413(c)(1), the plan must apply the minimum age and service requirements under 410(a) as if the employers are a single employer. For example, service with all the participating employers is counted in determining an employee s eligibility to participate in the plan. 2. Exclusive benefit rule. IRC 413(c)(2) applies the exclusive benefit rule as if the employers are a single employer. This permits the allocation of contributions and forfeitures across company lines without violating the rule that an employer's contributions must be made for the benefit of its employees and former employees. 3. Vesting. IRC 413(c)(3) treats the employers as a single employer for vesting purposes. For example, service with all the participating employers is counted in determining an employee's position on the vesting schedule. Further, the discontinuance of contributions and partial termination rules of Code Section 411 also apply to MEPs as if all employers participating in the MEP were one single employer. I.R.C. 413(c)(3). See also Reg. 1.413-2(a)(iii). 3072604v1 4

4. 415 Annual Addition Testing - Treat As One Plan. To apply the IRC 415 limits with respect to a participant, total compensation received by the participant from all of the employers maintaining the plan is taken into account, unless the plan specifies otherwise. For example, in a multiple employer plan that is a defined contribution plan, the compensation from all the participating employers is aggregated to determine the participant's 415(c) limit and the annual additions in the plan with respect to all the participating employers are aggregated to determine if the limit is exceeded. Reg. 1.415(a)-1(e). In general, annual additions mean the sum, credited to a participant s account for any limitation year of: (1) employer contributions, (2) employee contributions, and (3) forfeitures. See Treas. Reg. 1.413-6(b)(1)(i).If the employers had maintained separate plans this rule would not apply, and the section 415 limits would be separately determined for each employer because they are not part of a related group. 5. 402(g) Elective Deferral Limits. For purposes of the elective deferral limit under Code Section 402(g), the limit is based on deferrals from compensation earned by all employers participating in the MEP. 6. Plan Disqualification. If any one employer fails to meet any requirements that are tested or required on an employer-by employer basis, the entire MEP fails to meet the qualification requirements of the Code. Reg. 1.413-2(a)(3)(iv). D. Participating employers treated as separate employer for certain purposes. 1. Coverage, nondiscrimination and top heavy testing. The coverage and nondiscrimination testing rules are performed by each participating employer as if that employer maintained a separate plan. Treas. Reg. 1.413(c)-2(a)(3). In addition, each participating employer is treated as having a separate plan for purposes of top heavy testing. See Treas. Reg. 1.416-1, G-2. Only related employers are treated as a single employer for coverage, nondiscrimination and top heavy testing purposes. 2. HCE Status. The employee s compensation for services to the participating employer being tested should be considered employer by employer. I.R.C. 413(c)(6) and Treas. Reg. 1.414(q)-1T, Q&A-6. For example, if an employee s total compensation from all employers in the plan is $185,000, with $150,000 paid by Corporation A and $35,000 paid by unrelated Corporation B, the employee would be a highly compensated employee for purposes of Corporation A s test but would not be a highly compensated employee for Corporation B s test. The ownership HCE test would also be applied employer by employer. 3 3. Deductions. The contribution deduction limits are applied as if each participating employer maintains a separate plan. See I.R.C. 413(c)(6). 4. 401(k) ADP & ACP Testing. The MEP must be disaggregated for purposes of ADP and ACP testing. Reg. 1.401(k)-1(b)(4)(iv); Reg. 1.401(m)-1(b)(4)(iv). 5. Funding. If the multiple employer plan is a pension plan, the minimum funding requirements under IRC 412 generally are determined as if each participating employer maintained a separate plan. See IRC 413(c)(4)(A) and Treas. Reg. 1.430(d)-1(a)(3), 1.430(g)- 1(a)(2), 1.430(h)(2)-1(a)(2), and 1.403(i)-1(a)(2). Thus, the minimum required contribution is 3 A highly compensated employee is any employee who was a 5 percent owner of the company anytime during the year or preceding year or, for 2011, had compensation in excess of $110,000 ($115,000 for 2012). I.R.C. 414(q)(1). 3072604v1 5

computed separately with respect to each participating employer. For purposes of both 404 and 412, plan assets and liabilities are treated as assets and liabilities of a plan of each employer to the extent they would be allocated to the employer if it withdrew from the plan. IRC 413(c)(7)(B). An exception applies for plans established before January 1, 1989, under which funding may be determined as if the employers are a single employer (unless the plan has elected IRC 413(c)(4)(A) to apply). See IRC 413(c)(4)(B). Similarly, the deduction limits are applied as if each participating employer maintains a separate plan, subject to an exception that permits single employer treatment for certain plans established before January 1, 1989. See IRC 413(c)(6). E. Where It Is Not Clear If Employers Are Treated As One Or Separate. 1. Can Different Employers Make Different Levels Of Contributions Allocated To Each Employer s Employee-Participants? The well-known and widely used book S. Tripodi, The ERISA Outline Book, in the section in chapter 1A, in discussing the definition of multiple employer plan, states: In our view, whether each employer separately contributes for its employees is not the issue. Instead, the single plan issue should turn on the plan's treatment of invested assets with respect to its liabilities to make benefit payments. For the plan to be treated as a collection of separate plans under this view, the investments made with respect to each contributing employer's contributions would have to be separately accounted for, so that a participant's benefits earned with respect to contributions made by that employer could be paid only from the investments attributable to such contributions. Proponents of this view point in particular to 1.414(l)-1(b)(1)(i) and (v), which states that a plan does not fail to be a single plan merely because "the plan has several distinct benefit structures which apply either to the same or different participants," or because "separate accounting is maintained for purposes of cost allocation but not for purposes of providing benefits under the plan." However, the Tripodi book says that there is some doubt about this: Under the opposing view, the mere separate calculation of contributions on behalf of participants, which is determined along company lines, creates separate plans under IRC 414(l), even if the plan does not separately account for the investments attributable to such contributions. Under this theory, [employers] would be treated as maintaining separate plans, rather than a multiple employer plan, even though the companies operate their plans under a single plan document. Due to this issue, a separate IRS determination letter for a plan allowing different levels of employer contributions is very important. 2. Forfeiture Allocation In DC Multiple Employer Plan Must They Be Allocated Uniformly To All Employers Participants? This too is an area of some uncertainty. Sal Tripodi in his book continues: When a participant incurs a forfeiture under a multiple employer plan, how does the plan deal with the allocation of such forfeitures? Are the forfeitures allocated to all participants, regardless of which employer contributed the funds attributable to that forfeiture, or are the forfeitures allocated only to the participants employed by the company whose contributions are attributable to the forfeiture? Should the manner in which the plan deals with forfeitures affect whether the plan is a single plan? Some practitioners feel that the allocation method for the forfeitures is irrelevant to the single employer determination.... Proponents of this first view argue that the allocation of the forfeitures to the employees of a particular employer is simply a means of determining how much each participant's account increases for that plan year with respect to services with that employer, and does not mean that funds 3072604v1 6

attributable to that employer are available only to pay benefits of that employer's employees. When the plan pays benefits, the funds used to satisfy that payment might be attributable to investments made with respect to contributions (or forfeitures) attributable to a different company.... Other practitioners take the view that, in order to have a single plan, the plan must allocate the forfeitures to all participants who are eligible for allocations for that year, regardless of which company made the contributions attributable to that forfeiture. Due to this issue, a separate IRS determination letter for a plan allowing forfeiture allocation employer by employer is very important. F. Other Issues. Fee Negotiated Prior To Becoming Fiduciary Is Not Fiduciary Breach. An action cannot be sustained against a fiduciary for obtaining an excessive fee for his services to the plan if the fee was negotiated before he became the administrator. A person is only a fiduciary with respect to things over which he has control and discretion. F.H. Krear & Co v. Nineteen Named Trustees, 810 F.2d 1250 (2d Cir. 1987). However, even though a plan administrator's fee was negotiated before he became the administrator, he is a fiduciary with respect to the commissions received where his compensation is based on a percentage of claims paid and he exercised discretion over which claims would be paid. The administrator's fiduciary status is not diminished by the fact that the plan trustees had final authority to grant or deny claims and approve investments. American Federation of Unions Local 102 Health & Welfare Fund v. Equitable Life Assurance Society, 841 F2d 658 (5th Cir. 1988). Prohibited Transactions. There is a PT issue if the fees and expenses deducted from participants accounts, or from the trust as a whole in the case of a DB plan, are not solely plan expenses, i.e., if they include settlor expenses, such as the cost of adopting the plan. Possible Plan Asset Issues. The Plan Asset Regulations generally provide that when a Plan subject to Title I of ERISA or Section 4975 of the U.S. Internal Revenue Code.(an ERISA Plan ) acquires an equity interest in an entity that is neither a publicly offered security (as defined in the Plan Asset Regulations) nor a security issued by an investment company registered under the U.S. Investment Company Act, the ERISA Plan s assets include both the equity interest and an undivided interest in each of the underlying assets of the entity unless it is established either that equity participation in the entity by benefit plan investors is not significant or that the entity is an operating company, in each case as defined in the Plan Asset Regulations. For purposes of the Plan Asset Regulations, equity participation in an entity by benefit plan investors will not be significant if they hold, in the aggregate, less than 25% of the value of each class of equity interests of such entity, excluding equity interests held by any person (other than a benefit plan investor) who has discretionary authority or control with respect to the assets of the entity or who provides investment advice for a fee (direct or indirect) with respect to such assets, and any affiliates of such person. For purposes of this 25% test, benefit plan investors include all employee benefit plans, whether or not subject to ERISA or the U.S. Internal Revenue Code, including Keogh plans, individual retirement accounts and pension plans maintained by non-u.s. corporations, governmental plans, as well as any entity whose underlying assets are deemed to include plan assets under the Plan Asset Regulations (for example, an entity 25% or more of the value of any class of equity interests of which is held by 3072604v1 7

benefit plan investors and which does not satisfy another exception under the Plan Asset Regulations). If assets are plan assets of an ERISA Plan whose assets were invested in us, this would result, among other things, in (i) the application of the prudence and other fiduciary responsibility standards of ERISA to investments made by us, and (ii) the possibility that certain transactions that we, our Managing General Partner, the Investment Partnership and the subsidiaries of the Investment Partnership might enter into, or may have entered into, in the ordinary course of business might constitute or result in non-exempt prohibited transactions under Section 406 of ERISA and/or Section 4975 of the U.S. Internal Revenue Code and might have to be rescinded. A non-exempt prohibited transaction, in addition to imposing potential liability upon fiduciaries of the ERISA Plan, may also result in the imposition of an excise tax under the U.S. Internal Revenue Code upon a party in interest (as defined in ERISA), or disqualified person (as defined in the U.S. Internal Revenue Code), with whom the ERISA Plan engages in the transaction. Commonality. DOL Adv. Op. 2001-4. Based upon the DOL s informal view, PEO MEP plans are permitted, but "open" MEP plans may not be ok if there is no bona fide employer group or association. The income tax and ERISA Title I focus is different on this issue. The term employer is defined in section 3(5) of ERISA as 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. The department has taken the view, on the basis of the definitional provisions of ERISA as well as the overall statutory scheme, that, in the absence of the involvement of an employee organization, a multiple employer plan (i.e., a plan to which more than one employer contributes) may, nevertheless, exist where a cognizable, bona fide group or association of employers establishes a benefit program for the employees of member employers and exercises control of the amendment process, plan termination, and other similar functions on behalf of these members with respect to a trust established under the program. On the other hand, where several unrelated employers merely execute participation agreements or similar documents as a means to fund benefits, in the absence of any genuine organizational relationship between the employers, no employer association can be recognized. A determination of whether a group or association of employers is a bona fide employer group or association must be made on the basis of all the facts and circumstances involved. Among the factors considered are the following: how members are solicited; who is entitled to participate and who actually participates in the association; the process by which the association was formed, the purposes for which it was formed, and what, if any, were the preexisting relationships of its members; the powers, rights, and privileges of employer members that exist by reason of their status as employers, and who actually controls and directs the activities and operations of the benefit program. In addition, the employers that participate in a benefit program must, either directly or indirectly, exercise control over the program, both in form and in substance, in order to act as a bona fide employer group or association with respect to the program. However, arguably if each employer in an open MEP is treated as the plan co-sponsor, there is no commonality requirement. Additionally, an employer co-sponsor of a MEP can still take 3072604v1 8

advantage of the fiduciary risk mitigation aspects of a MEP by delegating its fiduciary responsibilities to the plan administrator or a lead employer sponsor. However, the duty to monitor would continue to exist. Tax Issue - Identity Of Plan Sponsor Must It Be Employer Whose Employees Are Covered By The Plan For IRS Purposes? Yes, except for a PEO plan. Authorities are Rev. Rul. 2008-45 and Rev. Proc. 2002-21, dealing with PEO retirement plans. It probably works if the plan sponsor adopts the plan for its employees, and other employers that become adopting employers, although there remains the separate commonality issue under ERISA. Rev. Rul. 2008-45 ruled that the exclusive benefit rule of Code 401(a) is violated if the sponsorship of a qualified retirement plan is transferred by an employer to an unrelated taxpayer and the transfer of the sponsorship of the plan is not in connection with a transfer of business assets, operations, or employees from the employer to the unrelated taxpayer. The Service stated that the exclusive benefit rule is violated where the transfer by employer A of its underfunded defined benefit plan to its wholly-owned subsidiary, B, where in exchange for assuming corporation's responsibilities under plan, the subsidiary receives cash and marketable securities and then due to a sale of B s stock to unrelated corporation C, B becomes member of unrelated employer C s controlled group. The sponsorship of plan was not transferred in connection with acquisition of business. Rather, substantially all business risks and opportunities under transaction were those associated with transfer of plan sponsorship. Although subsidiary was an employer with respect to employees of A while in A s controlled group, when the subsidiary's ownership was transferred to unrelated corporation C, the subsidiary was no longer an employer. Section 401(a) provides that, in order to be a qualified plan, a plan of an employer must be for the exclusive benefit of its employees or their beneficiaries. Consistent with this exclusive benefit rule of 401(a), Reg. 1.401-1(a)(2)(i) provides that a qualified pension plan is a definite written program and arrangement which is established and maintained by an employer to provide for the livelihood of employees or their beneficiaries after the retirement of the employees. Similarly, Reg. 1.401-1(a)(3)(ii) requires that a qualified plan be established by an employer for the exclusive benefit of its employees or their beneficiaries in order to be qualified. Section 414(a) provides that if an employer maintains a plan of a predecessor employer, then service for such predecessor is treated as service for the employer. By its terms, 414(a) applies only to an employer and does not create employer status for a taxpayer that is not an employer. Accordingly, when Subsidiary B no longer is a member of the Corporation A controlled group, the plan does not satisfy the exclusive benefit rule of 401(a) because it is not maintained by an employer to provide retirement benefits for its employees and their beneficiaries. Rev Proc 2002-21 deals the PEO issue where the PEO sponsors the retirement plan but employees are sometimes if not always the common law employees of the recipient employer, which contracts with the PEO to pay its employees and provide fringe benefits. The PEO sponsor of a single-employer plan converts that plan into a multiple employer plan adopted by the recipient employers whose employees participate in the plan. Rev Proc 2002-21, Sec. 5.03. If this is done, the IRS states that the PEO plan satisfies the exclusive benefit rule. Rev Proc 2002-21, Sec. 4.01. However, Rev Proc 2002-21 does discuss other tax-qualification problems that are associated with the multiple employer plan issue, i.e., it does not discuss relief with regard to coverage, nondiscrimination, and top-heavy failures. Rev Proc 2002-21 would seem to mean that a sponsor that converts to a multiple employer plan, each adopting employer must satisfy the 3072604v1 9

coverage, nondiscrimination, and top-heavy test separately. Separate coverage, nondiscrimination, and top-heavy tests would be applied to each adopting employer from their adoption of the plan. See Reg. 1.416-1, G-2 as to separate application of top heavy testing. If this testing occurred and it was determined that such requirements were not satisfied, then the revenue procedure requires that such issues must be resolved for the entire plan by the use of the Employee Plans Compliance Resolution System ( EPCRS ). See Rev Proc 2002-21, Sec. 7.01. Failure to do so would result in disqualification of the entire plan as to all employers. The multiple employer retirement plan must be submitted to the IRS to receive a determination letter after such conversion occurs. Rev Proc 2002-21, Sec. 5.03(6). A determination letter provides reliance with regard to the tax-qualified form of the retirement plan at issue. Rev Proc 2002-6. A determination letter submission also may verify the compliance of a tax-qualified retirement plan with the coverage rules mentioned above. Therefore, it is possible that the determination letter requirement could provide the IRS with the opportunity to verify that a plan converted in conformity with Rev Proc 2002-21 complies with certain tax-qualification rules discussed above during the time period before the conversion occurred. Rev Proc 2002-21, Sec. 5.03(6). This issue of tax qualification prior to adoption of the multiple employer plan may exist due to the unclear wording of Rev Proc 2002-21 as opposed to an intent of the IRS to enforce retroactively any tax-qualification rules. However, again, without further guidance from the IRS, this issue is not clear. 5500 Plan Audit Issues. Do Savings Really Exist If Audit Done Properly? Some MEP offerings are structured as an unaffiliated plan that targets employers with over 100 participants. These MEP promoters claim that the MEP as a practical way to lower the cost of the plan s annual audit. These employers, if they maintain their own plan, must include a CPA s audit report on the plan s operation along with the Form 5500. It is not unusual for a CPA audit to cost $10,000 or more annually. An audit is required if a plan has more than 100 participants. If there are nontraded assets in the plan, audit can be required for small plans unless additional bonding requirements are met. One way to achieve cost savings for the employer is to shift the cost of the audit from the employer to the plan participants. But will the total audit cost be less with a MEP? The answer is probably yes only if the MEP covers employees whose payroll is handled through a PEO. When two or more employers participate in a multiple employer plan, there is only one plan to audit. MEP promoters say that the cost to audit one plan that has, for example, three separate employers participating in it, is less than the cost to provide three separate audits. There would be economies for a MEP plan that involves employees of a PEO, where the PEO entity does the payroll for all participating employers. In this case, there is only one payroll for the auditor to test rather that looking at each separate employer s payroll. CPAs advise that a major cost of the plan audit arises from testing the compensation, deferrals, and other census derived compliance components of the plan s administration. Where each employer participating in the MEP does its own payroll, there is no commonality of payroll, so it is doubtful that there are substantial economies to an audit for such a MEP. Additionally, a financial statement audit is composed of two components: a review of internal controls and the audit work itself. The purpose of documenting and reviewing internal controls is to confirm that there are sufficient controls in place over the financial activity to allow the 3072604v1 10

auditor to rely on the financial statements prepared by management. If the controls in place are good, all the auditor needs to do is test a limited number of transactions, confirming the controls are in place, and then review the basis of the financial information provided. When there are no or limited internal controls, more testing is required, resulting in higher auditor fees. Some say that there is a MEP loophole in audit guide that sets out the rules for plan audits. The AICPA audit guide sets out the requirements for CPAs to follow in plan audits. However, the AICPA plan audit guideline do not discuss what is required for MEPs. Rather, it addresses MEP welfare plans and multi-employer (collectively bargained) retirement plans but not MEP retirement plans. Unions police the benefits they promise and that self-policing generally results in strong internal controls over the operation of the plan. The AICPA audit guide recognizes these controls exist and, as a result, permits the auditor to perform its testing of the participating employer s data (compensation, contributions, eligibility, vesting, etc.) once every four years. Apparently, some CPA auditors apply a similar reduced audit scope to their MEP clients, even though there is no authority to do so. We also spoke to an audit expert at the AICPA and were told that a CPA auditor cannot apply the once-every-four-years audit rule for multi-employer plans to MEPs. Such an audit could also be found to be insufficient. If that occurs, the CPA could be referred to state regulators. An insufficient audit report filed with a Form 5500 could also result in the rejection of the form 5500 fling by the DOL. That rejection places the plan fiduciaries at risk for late filing penalties and other participant actions. Prohibited Transaction. There is a PT issue if the fees and expenses deducted from participants accounts, or from the trust as a whole in the case of a DB plan, are not solely plan expenses, i.e., if they include settlor expenses, such as the cost of adopting the plan. Employer Securities. Ownership by a MEP of participating employer securities raises numerous issues. See http://www.klgates.com/files/publication/2e8a6c86-83f1-429e-a82d- 0153b48c5480/Presentation/PublicationAttachment/1750591d-55f3-47bc-9fdf- 0a6b74ecffe2/BNA_Article_Multiple_Employer_Plans.pdf Governmental MEPs. Title I of ERISA does not apply to Federal, state, or local government plans, as it does for private employers. A major question is to what extent the promoter can be paid from plan assets for its services. Can it be paid for monitoring the TPA and recordkeeper to be sure each employer meets qualification requirements, which is necessary to prevent entire plan going through EPCRS or being disqualified. Can it be paid for selecting the mutual funds offered for the plan, which would be a defined contribution 404(c) 401k plan, most likely a safe harbor 401k plan. Securities Law Issues. The SEC allows association plans and collectively bargained plans due to a nexus among the employers. One question is whether the trust fund of a multiple employer plan is treated as an investment company under the 1940 Act. My recollection is that there are some landmines here if investment discretion was completely centralized with one entity. Other issues or exceptions depend on whether the entity was a regulated financial institution or the type of investment (for example, insurance contracts). The securities law issues may also involve section 3(a)(2) of the 1933 Act. 3072604v1 11