I am pleased to bring you a guest post authored by friend, colleague and benefits-attorney-extraordinaire Ilene Ferenczy. Seems a good follow up to my Mountains and Molehills post. And, just for the record, I am not the TPA to which she refers.
The Right Way To Sponsor A MEP
When the idea of doing an Open Multiple Employer Plan (MEP) first became popular, a few of my TPA clients approached me about it. I thought it was a great idea from their perspective. It’s a way to improve compliance on the things that normal TPAs leave to their uninformed clients, and also helps create a tighter relationship between the clients’ plans and the TPA than a normal engagement. My clients asked me to research MEPs to look for any problems of which they were not aware. At that point, I came across the issue of the DOL’s historic rulings on multiple employer plans (i.e., that many do not constitute a single plan, but a grouping of individual plans), asked a DOL representative about Open MEPs in a meeting between the DOL and ASPPA’s Government Affairs Committee, and the rest is – at least in the small plan community – something like history.
The issue, just to remind everyone, is that a DOL finding that an Open MEP is really a grouping of individual plans means that each employer’s portion of the MEP needs its own Form 5500 and, if it has sufficient participants, a CPA audit. Assuming that such a finding, if it occurs, happens several years down the road, the preparation and filing of the Forms and audits that are in arrears would be required. Unless, of course, the DOL makes its ruling and provides that it will be enforced only prospectively, which would be a relatively welcome result that is in no way guaranteed.
When meeting with one of my TPA clients last week, we began discussing Open MEPs again, and he said to me, “So, you still think I shouldn’t get involved with one, right?”
I was shocked. “No, that’s not what I think!” I protested.
But, then I realized that this is what everyone who knows me in the benefits community thinks. I have a reputation for being anti-MEP.
The fact is, I’m not anti-MEP. I’m anti-ostrich. Ostriches see danger around them and put their heads into the sand and pretend that they are safe. I don’t want a single one of my TPA clients or one of their plan sponsor clients to get into horrible trouble if the DOL ultimately decides that Open MEPs are not single plans.
The approach being taken by many practitioners is the ostrich approach. They convince themselves that the DOL will never take the position towards retirement plan MEPs that it takes in regard to health plan MEPs. These same practitioners also, by the way, ignore the second MEP problem, which is what has become known as the “one bad apple” rule. This is the acknowledgement that an adopting employer in an Open MEP can take certain actions that will cause a disqualifying failure to occur in the MEP. The IRS position is, and always has been, that a disqualifying failure in a plan taints the entire plan, not just the portion of the plan that is responsible for the failure. This applies whether the failure is because of a bad action by an adopting employer or an error by the TPA that is the Open MEP sponsor. One way or the other, the plan will need to fix the problem under the Employee Plans Compliance Resolution System (EPCRS). While a contractual provision in the MEP can hold the bad adopting employer responsible, it is possible that this individual may not or cannot accept financial responsibility for fixing the plan.
So, in summary, an Open MEP sponsor who wants to “do things right” needs to acknowledge the two risks it faces: a DOL holding that an Open MEP is not one plan, plus a plan error that needs correction without a willing and culpable adopting employer to accept the cost of fixing the problem.
This is akin to the risks taken by insurance companies. Surely a company that insures earthquake damage in California does not bury its head in the sand and plan its premiums based on the idea that an earthquake will never occur or, if it does occur, it won’t damage anything! What insurance companies do is plan the premiums so that they throw off enough extra to create reserves for the eventuality that something bad may happen.
This is the approach that I encouraged my TPA client who wants to sponsor an Open MEP to take. Charge adopting employers sufficiently so that you can have reserves to pay for the possible costs that result from the negative risk coming to light.
It will be possible, if not even common, that administrative errors will take place in your Open MEP. Some of them will be attributable to a given client, and that client will do what it is contractually obligated to do and pay the costs of correction. But others will not, and some of the errors may even be attributable to an error by the sponsoring TPA. You need to have amounts in reserve to pay for the costs of correction and any necessary filing with the government.
It is also possible that the DOL will rule that Open MEPs are a grouping of individual plans and not a single plan. If that happens, your clients will need to get and pay for individual audits and Forms 5500 in arrears. You should have enough funds in reserve to pay for the costs of this process – or enough of the costs of this process – that you don’t end up being sued by every adopting employer for misrepresentation and damages.
There may be other ways to plan for possible financial problems. You could disclaim responsibility in your contract and require an assessment of the adopting employers if something untoward occurs. However, you then need to deal with the fact that, while you are trying to sell this idea to your clients, you are telling them that it may not fly.
What if none of these problems comes to pass? You may choose after a positive DOL ruling (if it occurs) or several years of error-free administration to take part of your reserves as profit. Insurance companies certainly do that when their experience is more favorable than the actuaries originally thought. Or, you can give your clients a fee holiday to let them share in the good experience of your plan. It’s up to you.
So, the moral is: I’m not anti-MEP, I’m anti-ostrich. A smart business person plans for possible problems in the future, and doesn’t pretend that there is no potential for concern. Before you put a significant part of your business at risk, plan how to insure yourself against that risk so that you live to fight another day.