Protections Needed for Professional Employer Organizations, Group Says

October 1, 2019

CC:PA:LPD:PR (REG-121508-18)
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Attention: Multiple Employer Plans — REG-121508-18

This letter provides the comments of the National Association of Professional Employer Organizations (“NAPEO”) on the proposed regulations issued by the Department of Treasury (“Treasury”) and Internal Revenue Service (“IRS”) regarding the Proposed Rule “Multiple Employer Plans,” which would amend the Income Tax Regulations (26 CFR part 1) under section 413(c) of the Internal Revenue Code (“Code”) (referred to throughout this letter as the “Proposed Rule”).

NAPEO supports the Proposed Rule and commends Treasury and IRS for issuing this rulemaking. PEOs have long provided retirement benefits as an offering to their clients, and they commonly do so by sponsoring multiple employer plans (“MEPs”), making those MEPs available, and then administering them for the benefit of the plan participants (and their beneficiaries). Accordingly, the Proposed Rule is a welcome solution that will directly impact MEP administrators and participants for the better. By liberalizing the “unified plan” rule, the Proposed Rule diminishes a potential disincentive to employers from participating in MEPs, and therefore warrants the full support of NAPEO and its members.

About NAPEO and Professional Employer Organizations

NAPEO is the voice of the professional employer organization (“PEO”) industry. PEOs provide comprehensive HR solutions such as payroll, employee benefits, human resources, tax administration, and regulatory compliance assistance for small and mid-sized businesses. By taking care of paperwork and providing regulatory compliance assistance, PEOs help businesses improve productivity, increase profitability, and focus on their core mission. Through a PEO, the employees of their small and mid-sized business clients gain access to employee benefits such as 401(k) plans; health, dental, life, and other insurance; dependent care; and other benefits they might not typically receive as employees of a small company.

There are approximately 907 PEOs in the United States providing services to 175,000 small and mid-sized businesses, employing 3.7 million people. The PEO industry's 175,000 clients represent 15 percent of all employers with 10 to 99 employees.¹ The total employment represented by the PEO industry is roughly the same as the combined number of employees for Walmart (United States only), Amazon, IBM, FedEx, Starbucks, AT&T, Wells Fargo, Apple, and Google. Between 2008 and 2017, the number of PEO client worksite employees grew at a compounded annual rate of 8.3 percent, which is 14 times higher than the compounded annual growth rate of employment in the economy overall during the same period.

Prior IRS and DOL Recognition of PEO Sponsored MEPs

The IRS previously recognized that a PEO may offer a MEP for its client employers through IRS Rev. Proc. 2002-21. Earlier this year, on July 29, the Department of Labor (“DOL”) issued a final rule confirming that a “bona fide” PEO (as defined) could act as an employer for the purpose of sponsoring a MEP covering employees of client employers pursuant to section 3(5) of the Employee Retirement Income Security Act of 1974. We expect that IRS and DOL's explicit recognition of PEOs' ability to sponsor retirement MEPs, and the continuing growth of the PEO industry, will generate heightened interest from small and mid-sized businesses in providing retirement benefits to their employees through a PEO relationship.

PEO-Sponsored MEPS by the Numbers

One of the most important benefits that PEOs offer to their clients is increased access to employer-sponsored retirement plans, such as 401(k) plans. Such plans are far more likely to be available to a company that uses a PEO than to a comparable small company that handles all HR functions in-house. As shown in a 2013 NAPEO white paper, 98 percent of all PEOs offer some type of retirement plan as part of their service offerings.² Comparably, based on the 2013 data, only 16 percent of employees at companies with fewer than 10 workers, and 30 percent at companies with 10 to 49 employees, are offered any type of retirement solution.

The differences in retirement plan availability are reflected in similarly large differences in employee retirement-plan participation between those working for PEO clients and those not. Among the smallest businesses (employing fewer than 10 workers), the percentage of employees participating in employer-provided retirement plans is over 3 times greater among employees working at PEO clients than it is among employees of all other similarly-sized businesses (Figure 1).³ Likewise, for employees working for somewhat larger businesses (with between 10 and 49 employees), there is a 29 percent increase in retirement-plan participation when utilizing a PEO.

The structure of PEOs makes possible the efficient delivery of 401(k) retirement benefits to small businesses and their employees. According to a GAO report, most MEPs sponsored by PEOs have at least 400 participating employers in their defined contribution plans.⁴ Assuming reporting costs are shared by participating employers within a MEP, an employer joining a MEP can save virtually all the reporting costs. Large plans could enjoy even higher cost savings if audit costs are taken into account. The GAO estimates that reporting cost savings associated with Form 5500 and an audit report would be approximately $8,165 per year for a large plan joining a PEO MEP.

Why the Proposed Rule is Necessary and Welcome

The “unified plan rule” as presently reflected in the Code section 413(c) regulations discourages participation in MEPs. Employers are less likely to participate in MEPs knowing that if an unrelated employer fails to satisfy one of the Code's tax-qualification rules, the entire MEP could be disqualified. As a practical matter, there are no compelling policy reasons why multiple employers participating in the MEP should have to bear the risk of disqualification if a completely unrelated employer creates a qualification issue for the MEP. It therefore is only sensible that there should be a clearly articulated process for correcting these types of discrete issues.

From the PEO industry's perspective, we appreciate that the Proposed Rule explains how a plan administrator can obtain relief if a participating employer does not respond to a request for information or fails to take action to correct a qualification issue (or, as the Proposed Rule contemplates, initiate a spinoff). This enables a PEO (as a MEP plan administrator) to address a particular failure by initiating a spinoff of the plan assets and account balances of the employees of the unresponsive client employer, followed by a termination of the spun-off plan. This clearly articulated process will give comfort to other employers that participate or are considering whether to participate in the MEP, since they will know that any plan qualification issues created by other unrelated participating employers can be remedied (even if the unrelated employer is uncooperative).

An Unrelated Examination Should Not Exclude Use of the Exception

While NAPEO and its members support the Proposed Rule, we encourage Treasury and IRS to consider revising the Proposed Rule to eliminate the requirement that a MEP not be “under examination” at the time of a first notice to an unresponsive employer in order to be eligible for the exception to the “unified plan rule.” We do not believe there is a compelling reason for this requirement. First of all, it is not always clear if a plan is “under examination,” notwithstanding the detailed definition in the Proposed Rule. For example, a plan is considered “under examination” if “an authorized representative [of the plan] has received verbal or written notification of an impending Employee Plans examination, or of an impending referral for an Employee Plans examination.” There will undoubtedly be circumstances under which there will be questions regarding whether a particular individual is an “authorized representative” of a plan and whether an “impending referral” has been communicated, verbally or otherwise.

The Proposed Rule also acknowledges the difficulty in determining if the first notice has been sent when a potential qualification failure becomes a known qualification failure but an examination has been commenced in the interim. Second, even if a MEP is “under examination,” we are aware that an Employee Plans examination can be a lengthy process that can take months or even possibly years. MEP administrators will certainly face situations where they become aware of a participating employer failure while under examination, and the Proposed Rule contemplates that a MEP document must contain language that describes the procedures that would be followed to address participating employer failures in order to utilize the exception to the “unified plan rule.” Therefore, in those circumstances, the MEP administrator would be compelled to follow the terms of their plan document, but constrained by the fact that they are under examination and therefore technically unable to use the exception. We believe that Treasury and IRS should modify the Proposed Rule so that MEPs can utilize the process described in the Proposed Rule even if “under examination.” Certainly, this will not constrain the IRS's ability to require the MEP administrator to take other action as it deems appropriate if the IRS becomes aware of a participating employer failure while the MEP is under examination.

IRS Information Requests Should Be Limited to Information Controlled by the Administrator

We also request a clarification of one of the other requirements for a MEP to be eligible for the exception to the “unified plan rule.” Proposed section 1.413-2(g)(2)(i)(D) requires as one of the conditions of eligibility that “the section 413(c) plan administrator complies with any information request that the IRS or a representative of the spun-off plan makes in connection with an IRS examination of the spun-off plan, including any information request related to the participation of the unresponsive participating employer in the section 413(c) plan for years prior to the spinoff.” We suggest modifying this language to read, “the section 413(c) plan administrator complies with any information request relating to information within the control of the section 413(c) plan at the time of the request that the IRS or a representative of the spun-off plan makes in connection with an IRS examination of the spun-off plan, including any information request related to the participation of the unresponsive participating employer in the section 413(c) plan for years prior to the spinoff.”

The intent of this suggested revision is to clarify that a MEP will not lose eligibility for the exception if it is unable to comply with an information request made by the IRS or the spun-off plan solely because the MEP is not in possession of the information requested. For example, the IRS might request that the MEP provide it with certain records relating to the unresponsive participating employer, but the MEP may simply not have those records because it also was unable to obtain them from the unresponsive participating employer when it was participating in the MEP. The MEP should not be considered to be noncompliant with the information request under these circumstances, and the regulatory language should make this clear.

Request for Additional Guidance on Fiduciary Responsibility of Spun-Off Plans

Finally, we would like to express our support for further rulemaking with regard to potential fiduciary issues under ERISA that could arise with regard to implementation of the Proposed Rule. In the preamble to the Proposed Rule, Treasury and IRS note that DOL had advised them of the potential “that a section 413(c) plan administrator implementing a spinoff-termination may have concerns about its fiduciary responsibility both to the MEP and to the spun-off plan, as well as potential prohibited transaction issues.” These are indeed significant issues to MEP administrators, and we would encourage DOL to issue guidance that will address these topics.

Conclusion

In conclusion, NAPEO and its members reiterate our support for the Proposed Rule, which we believe will benefit small and mid-sized businesses and their employees who utilize PEOs. The Proposed Rule provides additional protection to individuals who rely on PEOs-sponsored defined contribution MEPs for their retirement security and provides additional clarity to the PEOs that administer such MEPs.

NAPEO — and its nearly 500 PEO and service partner members — appreciate the opportunity to comment on this Proposed Rule. If you have any questions, feel free to contact Thom Stohler, Vice President of Federal Government Affairs, (703) 739-8167.

Sincerely,

Pat Cleary
President and CEO
NAPEO
Alexandria, VA