GAO recommends IRS, DOL coordinate oversight of multiple employer plans

The Government Accountability Office (GAO) has released a report recommending that the IRS and Labor Department increase their coordination in overseeing multiple employer plans and should jointly develop guidance on the establishment and operation of these types of plans.

What the study found

Multiple employer plans (MEPs), a type of pension plan maintained by more than one employer, have been supported as an option that could expand coverage to small businesses by lowering administrative costs. However, the GAO said, little is known about the characteristics of private sector MEPs, especially information regarding the employers that participate in them. Three major sponsor types emerged among the top 25 plans: large corporations, associations, and professional employer organizations (PEO), which are firms that provide payroll and other human resources services to clients. These sponsor types differ in various ways, but notably, associations and PEO sponsors that the GAO interviewed tended to have a large number of employers participating in their plans. According to the GAO, little is also known about a fourth category of sponsor type called “open” MEPs, a type of MEP in which employers in the plan share no common relationship or affiliation with the other employers in the plan.

The GAO report examined (1) the characteristics of private-sector MEPs, (2) the advantages and disadvantages of MEPs and how their perceived advantages are used to market them, and (3) how the IRS and Labor Department regulate MEPs. The GAO interviewed MEP sponsors, pension experts, officials at the Department of Labor, the IRS, and the Pension Benefit Guaranty Corporation (PBGC), and analyzed the Form 5500. MEPs are marketed as providing several advantages for employers over single-employer plans, but the GAO found that these advantages may not always be unique to MEPs.

MEPs are marketed as providing reduced fiduciary liability, administrative responsibility, and cost. However, the GAO found that other types of single-employer plans may also offer reduced fiduciary responsibility and that third-party administrators can reduce administrative responsibilities. Given that employers do not directly oversee the plan, there was also some concern from Labor officials regarding the risk of MEP abuses, such as charging excess fees or mishandling the plan’s assets. Additionally, because all of the participating employers are responsible for maintaining the MEP, if one employer becomes noncompliant with the tax requirements the plans of all the employers in the MEP may lose their tax-qualified status.

The Labor Department regulates MEPs for participant protections under ERISA, while the IRS regulates them for preferential tax treatment under the Internal Revenue Code. However, the GAO found, ERISA places requirements on plans that are not required under the Code and the DOL and IRS do not coordinate to reduce the impacts of defining a MEP differently. For example, although Labor recently opined that open MEPs are a collection of single plans, each separately sponsored by participating employers for their employees, open MEPs still qualify for preferential tax treatment under the IRC. Pension experts told the GAO that such differing treatment can create compliance challenges. For example, an open MEP may be able to file a single annual report for the IRS but may also have to file annual reports for each of its component plans for Labor. Pension experts agreed that compliance guidance from either agency would be helpful.

GAO recommendations

In its report, the GAO recommended that the Labor Department lead an effort to collect data on the employers that participate in MEPs. Specifically, the GAO recommended that the Secretary of Labor direct the Employee Benefits Security Administration (EBSA) to take the lead in gathering useful oversight information about the employers that participate in MEPs. A likely source for collection of this data would be the Form 5500, as it is the primary source of private pension data for government oversight activities.

In addition, the GAO said, the Labor Secretary should instruct the Assistant Secretary of EBSA and the Secretary of the Treasury should instruct the Commissioner of Internal Revenue to “formalize their coordination with regard to the statutory interpretations reflected in Labor’s advisory opinions related to MEPs.” Furthermore, the report said, the Agencies should coordinate to develop compliance-related guidance on the establishment and operation of MEPs under ERISA and the Code. According to the report, the Agencies generally agreed with the GAO’s recommendations.

Source: General Accountability Office (GAO) report GAO-12-665, September 13, 2012.

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For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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