By Ian Berger, JD
If you run a small company, you may be reluctant to offer a retirement plan to your employees because of the cost of plan administration and compliance. If so, you’re not alone: approximately 38 million American workers lack access to a company savings plan.
Recently-issued Department of Labor rules may provide some relief. The rules are designed to make it easier for unrelated companies to provide a retirement savings plan by joining an “association retirement plan” (ARP).
Current rules. Under current rules, unrelated companies who want to participate in a jointly sponsored retirement plan are required to join a “multiple employer plan.” However, a multiple employer plan can only be sponsored by an association of companies who share a common nexus. This means participating businesses must have a certain connection, such as being members of a trade association. The current multiple employer plan rules have had only limited success in helping small employers establish joint retirement plans.
New rules. The new DOL rules follow issuance of an Executive Order by President Trump in August, 2018, which ordered the Department of Labor to consider proposing regulations that would expand access to MEPs.
The new rules allow companies to join an ARP as long as they satisfy one of the following conditions:
- The companies operate in a common geographic area – even if they operate in different trades or industries; or
- The companies operate in the same trade or industry – regardless of where they are located.
An ARP can be offered by a business association, such as a Chamber of Commerce, or by a “professional employer organization.” A professional employer organization is a company that contractually provides certain human resources functions for its member clients.
For a small company, the advantage of joining an ARP is that the ARP sponsor – not the participating company – would be responsible for complying with ERISA administrative rules and would be subject to the ERISA fiduciary rules.
An ARP can only sponsor a defined contribution plan such as a 401(k) plan – not a defined benefit pension plan.
The new rules are effective September 30, 2019.
More relief on the way? The proposed SECURE Act, a piece of legislation that includes several retirement-related provisions, would go beyond the new DOL rules to allow totally unrelated companies with no common nexus to also establish ARPs. The SECURE Act passed the House of Representative by a wide margin, but is currently stalled in the Senate.
The SECURE Act (again – proposed) would also provide relief from the current “one bad apple rule,” which penalizes all participating companies in an ARP if one company violates certain IRS rules. The IRS itself recently proposed relief from the “one bad apple rule,” but that proposal is a long way from being finalized.