Multiple Employer Plans: The Devil is in the Details

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Multiple Employer Plans The Devil is in the
Details

• Roger J. Rovell, Esq.
• Ward Rovell
• rrovell_at_wardrovell.com
• [phone]
• Tampa, Florida

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TOPICS

• Payment of Plan Expenses
• Overlooked Testing Issue Mandatory HCE
  Aggregation
• Departed or Problem COs Getting Rid of Plan
  Assets
• Multiple Employer Plan Arrangements for HRO/ASO

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I. Payment Of Plan Expenses

• ERISA 404 Plan assets should be used for
• exclusive purpose of providing benefits and
• Defraying reasonable administrative expenses.
• Decision to pay expense from plan assets is a
  fiduciary function.

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• According to Department of Labor (DOL)
• Two basic categories of employee benefit plan
• expenses.
• Settlor expenses relating to the formation,
  design or termination of plan.
• Plan management or non-settlor expenses
  includes plan management, implementation or
  maintenance expenses.

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Settlor expenses cannot be paid by plan.

• According to Department of Labor
• Formation, design and termination (i.e., settlor)
  expenses are incurred for benefit of employer
  expenses employer expected to bear in the normal
  course of business.

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Non-settlor administrative expenses.

• Once established, plan must be implemented,
• managed and administered (i.e.,non-settlor
• expenses).
• If implementation, plan management or
  administrative expenses are reasonable they may
  be paid from plan assets.
• Fiduciary to determine if expense reasonable.
• DOL does not issue advisory opinions on whether
  expense is reasonable.

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Cost to establish plan.

• Feasibility study and design expenses are settlor
• functions not payable from plan assets.
• Preparation of initial plan document is settlor
• function not payable from plan assets.
• Expenses to implement settlor decision may be
• expenses payable from plan assets.
• Plan communication (SPDs, etc.).
• Amendments required by changes law.
• Requesting IRS determination letter.

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Administrative expenses.

• Reasonable plan administrative expenses may
• be paid by the plan
• Third party service fees for record keeping and
  administration (including start-up costs).
• Legal fees for plan related issues.
• Cost of reporting and disclosure (SPDs, annual
  reports, summary annual reports).
• Cost of bond.

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• Bundled administrative services apportion
• between settlor and non-settlor functions.

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Amendments to Plan.

• Plan amendment may be settlor function (not
  payable from plan assets) or expense payable from
  plan assets.
• Amendment to maintain tax qualified status of
  plan payable from plan assets.
• Amendment to modify plan design is settlor
  functions not payable from plan assets.
• Amendment often have dual characteristics.

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IRS determination letter.

• No requirement to obtain determination
• letter strongly advised by practitioners.
• Cost of obtaining IRS determination letter is
  payable from plan assets.

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Plan termination expenses.

• Dual characteristics settlor and non-settlor
• (implementation) expenses.
• Expense associated with decision to terminate
  deemed settlor expense not payable from plan
  assets.
• Amendment terminating the plan is settlor
  function not payable from plan assets.
• Portion of amendment expense may be payable from
  plan assets cost to update plan to comply with
  current law as of termination date.

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• Cost to obtain IRS determination letter upon
  termination implementation cost payable from
  plan assets.
• Costs of processing distribution elections,
  preparing checks implementation cost payable
  from plan assets.
• Final 5500 for terminated plan is administrative
  expense payable from plan assets.

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Plan communication expense.

• ERISA disclosure requirements
• Generally viewed as plan management or
  non-settlor functions payable from plan assets.
• Includes cost of preparing SPDs and summary
  annual reports.

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Administrative services provided by plan
sponsor/fiduciary.

• Plan sponsor/fiduciary can provide
• administrative services to plan if fiduciary
• receives no compensation.
• Exception Fiduciary can receive
• reimbursement of direct expenses properly and
• actually incurred in the performance of
• administrative services.

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• Under DOL regulations, expense is not direct
  expense to the extent it would have been
  sustained had the service not been provided or if
  it represents an allocable portion of overhead
  costs.

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• Direct expenses include in-house costs to
  administer benefit programs, such as
• Salary and benefits costs of benefit department
  personnel.
• Long distance telephone expenses.
• Dedicated computers.
• Copying.
• Mailing costs.
• Plan-related business travel and education
  expenses.
• Plan sponsor may not charge plan for overhead
  costs, including rent, office space and general
  telephone expense.

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Reimbursement of plan sponsor for employee salary
and fringe benefits

• Be able to demonstrate that, except for the
  services provided to the plans, the employees
  would not be employed.
• Salaried employee should spend large majority of
  time on plan administration (must apportion if
  necessary).
• Detailed record keeping to substantiate time
  spent by employees (on an hourly basis) on plan
  administration.

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Hourly employee that does not provide full-time
services to plan

• May be reasonable to assert expense would not
  have been sustained had the service not been
  provided.
• Careful documentation of hours spent on plan
  administration.

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Recent DOL and IRS guidance on allocating plan
expenses.

• DOL Field Assistance Bulletin 2003-3
• (FAB 2003-3) and IRS Revenue Ruling 2004-10
• (Rev. Rul. 2004-10).
• Plan language controls
• If plan has specific provisions for allocating
  expenses, fiduciaries must follow.

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• If plan documents are silent, fiduciaries must
  act prudently and in the interest of
  participants.
• According to DOL, ERISA places few constraints on
  how expenses are allocated plan sponsor has
  considerable discretion.

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Expenses Allocated to Individual Accounts.

• Some expenses may be charged solely to
• individuals account, including
• Hardship distribution expense.
• Benefit distribution expense.
• QDRO determination expense.
• Fees for self-directed investment options.
• Plan loan expenses.

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• SPD must disclose expenses that may be paid
• from plan assets.
• Reasonable administration expenses can be
• charged solely to terminated vested
• participants even if expenses not charged to
• active participants.

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Allocating expenses among all participants pro
rata vs. per capita.

• Guidance addresses whether general plan expenses
  should be allocated on a pro rata or per capita
  basis.
• Pro rata method allocates expenses among
  individual accounts on the basis of assets in an
  individual account.
• Per capita method allocates expenses equally to
  each account.

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• Method of allocation must be reasonable.
• Selected method might favor one class of
  participants if rational basis for the selected
  method.

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• DOL pro rata method in most cases an
• equitable method of allocation.
• DOL per capita method may be used for
• allocating certain fixed administrative expenses,
• such as
• Record keeping.
• Legal.
• Auditing.
• Annual reporting.
• Claims processing and similar administrative
  expenses.

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• Fees determined on the basis of account balances,
  such as investment management fees, should be
  charged pro rata.
• Investment advisory services to individual
  participants might be charged either pro rata or
  per capita without regard to actual utilization.
• Investment advisory services might also be
  charged on a utilization basis to individuals
  account.

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Recap of Expenses that Should Not be Charged to
Plan (i.e., settlor expenses)

• Plan establishment, design and termination
• costs (implementation of these settlor costs
• may be payable by plan).
• Plan amendments with a business purpose and
• without a compliance/regulatory component.
• Cost associated with correction of plan defects
• under voluntary correction programs.
• Excise taxes and cost of preparing forms to pay
• excise taxes.

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Recap of Expenses that May be Charged to Plan

• Third party administration fees.
• Legal fees relating to plan issues.
• Investment advisory and management
• fees.
• Third party trustee or custodian fees.
• Bonding cost.
• Accounting fees.

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• Claims processing and payments check
• writing, benefit calculations, hardship
• distributions, distribution processing.
• Reporting and disclosure costs (i.e., SPDs,
• annual reports and summary annual reports).
• Plan amendments for regulatory compliance or
• to preserve tax-qualified status.
• Implementation costs of plan establishment,
• amendment or termination.

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• Determination letter costs.
• Direct expenses of plan sponsor.

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Overlooked Testing Issue Mandatory HCE
Aggregation

• Rule applied when HCE participates in more than
  one 401(k) plan maintained by the same employer
  during plan year.
• Rule applies to HCEs only.
• HCEs deferral amounts and matching contributions
  in all 401(k) plans in which HCE participates
  must be added together when computing HCEs
  deferral percentage and matching percentage under
  each 401(k) plan.
• Regulations suggest that compensation also
  aggregated.

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• Failure to apply rule results in failure to
  correctly perform nondiscrimination tests
• Could result in plan disqualification.

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• Common scenarios requiring HCE aggregation
• Example 1 Client organization (CO) maintains
  401(k) plan for part of plan year and transitions
  to a PEO multiple employer plan (MEP) during
  same plan year.
• For discrimination testing purposes, CO is deemed
  to maintain two 401(k) plans during the plan
  year CO-sponsored plan and PEO-MEP.
• Mandatory HCE aggregation applies to each plan.

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• Example 2 CO adopts MEP sponsored by PEO-A. CO
  Terminates relationship with PEO-A during plan
  year and enters into relationship with PEO-B and
  adopts PEO-Bs MEP.
• COs HCEs participate in two 401(k) plans
  (PEO-As MEP and PEO-Bs MEP).
• Each MEP must apply mandatory HCE aggregation.

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Possible options for dealing with mandatory HCE
aggregation rule.

• Each plan separately runs nondiscrimination
• tests.
• Practical problems
• Requires HCE deferral (and matching and
  compensation) data to be shared between plans
  data would not be available for several months
  after transition event occurs.
• If corrective distributions are necessary, assets
  may not be available for distribution.

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• Consider permissive aggregation
• All 401(k) plans in which HCE participates
• during a plan year are tested as one
• single plan for the entire plan year.
• Mandatory HCE aggregation is satisfied since both
  HCE and non-HCE deferrals (and matching and
  compensation) under all plans are aggregated.
• Requires less testing one set of
  nondiscrimination tests.

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• For permissive aggregation, plans must
• have same plan year and use same
• testing method.
• Current year testing method is generally easier
  to apply.
• For mid-year transitions, parties may agree that
  plan covering employees at end of plan year will
  perform nondiscrimination tests.
• See PEO Insider article Testing Trap for the
  Unwary An Overlooked Issue for Multiple
  Employer Plans, May 2004.

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III. Departed or Problem COs Getting Rid of
Plan Assets

• Departed COs often leave assets in PEO - MEP.
• Administrative hassle and expense
• associated with assets.
• Failure of CO to follow tax qualification rules
• can risk qualified status of entire PEO-MEP.
• Failures can range from coverage testing to
  failure to make top-heavy contributions.
• Might protect PEO-MEP if offending assets are
  removed from PEO-MEP.
• See PEO Insider article Avoiding Retirement Plan
  Disqualification, November 2000.

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• Participant distributions may not be permissible
  method of removing assets from PEO-MEP.
• Asset transfer may be acceptable, but
• No trustee-to-trustee transfer unless CO agrees
  to establish successor 401(k) plan to receive
  asset transfer.
• See PEO Insider article Saying Goodbye to
  Employees and Clients, February 2003.

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• To encourage CO to establish successor plan -
• Client service contract could require payment of
  fees if departed client refuses to establish
  successor plan.
• Plan provisions could trigger full vesting if
  assets are not transferred within specified time.
  

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Establishing a spin-off/termination plan.

• Spin-off/termination plan receives asset transfer
  from the PEO-MEP, then immediately terminated and
  assets distributed to participants.
• Trustee-to-trustee transfer from PEO-MEP to
  spin-off/termination plan is not an impermissible
  distribution from PEO-MEP.

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• CO may refuse to adopt/execute a spin
  off/termination plan.
• Solution Have CO agree in advance to appoint
  PEO as agent for purposes of establishing
  spin-off/termination plan.
• Careful drafting is important to allocate as much
  liability as possible to CO for the
  spin-off/termination plan.

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IV. Multiple Employer Plan Arrangements for
HRO/ASO.

• 401(k) options
• ASO client could adopt a PEO-MEP
• The ASO client could have stand-alone plan
  sponsored by ASO client.
• Advantages of using MEP
• Bonds ASO client value-added proposition.
• Administrative cost for MEP is generally lower
  than the cost for stand-alone single employer
  plan.

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Plan drafting issues.

• A PEO-MEP may be drafted to exclude
• individuals who are not on PEO payroll.
• PEO-MEP can be modified to override this feature
  for ASO adopters.

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Section 125 plans.

• PEOs generally maintain either single employer
  Section 125 plans or multiple employer style
  Section 125 plans (ME style 125 plan).
• ME-style 125 plan could be used with ASO client.
• ASO client could sponsor stand-alone 125 plan.
• PEO single employer 125 plan should not cover
• employees of ASO client.
• No employment relationship between the PEO/plan
  sponsor and employees of ASO client.

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• 125 plan sponsored by ASO client may be cleaner
  option.
• Unresolved issues/gray areas, especially if
  ME-style 125 arrangement includes medical
  flexible spending account plan.