Multiple-employer plans for small businesses.

• Author: Koppel, Michael D.

Jill owns a hardware store on Main Street in a small town. The store to her left is a women's clothing store owned by Mary. To her right is a sporting goods store owned by James. Each business is an S corporation and has five full-time employees. Jill, Mary, and James are not related.

Jill, Mary, and James were having breakfast one morning with Mary's cousin, John, who is a CPA.They told him that they would love to be able to offer their employees a retirement plan but that the fees were too expensive. John asked if they had explored the option of a multiple-employer plan (MEP). He let them know that in July 2019, the U.S. Department of Labor (DOL) finalized a rule that expands access to affordable quality retirement saving options for Americans working in small and midsize businesses (84 Fed. Reg. 37508 (July 31, 2019)). The new rule clarifies the circumstances under which an employer group or association or a professional employer organization may join together to sponsor a defined contribution retirement plan for its members.

According to the DOL, MEPs will allow small and midsize businesses to obtain the economies of scale for administrative costs and investment choices currently enjoyed by large employers and lower the costs and decrease the regulatory burden and fiduciary liability of providing retirement benefits for these businesses. This item discusses some of the conditions set out in the rule for an employer group or association to join together to establish a MEP and who can be covered under the plan.

Purpose of the association

A group or association of employers must have "at least one substantial business purpose unrelated to offering and providing MEP coverage" (84 Fed. Reg. at 37530). The rule goes on to explain that it is perfectly legitimate for associations to form, in part, as a means of achieving the sorts of economies of scale, bargaining power, and administrative expertise that enable them to provide valuable benefits to their members, as long as they also serve another unrelated substantial business purpose. The "other" business purpose(s) or activity must be substantial enough that the association could, under different circumstances, be a viable entity even in the absence of sponsoring a MEP.

While this sounds onerous, the preamble to the rule explains that this can include promoting common business interests of its members or the common economic interests in a given trade or employer community and is not required...