There are both single-employer pension plans and multiple employer plans (MEPs). In a single-employer plan, only employees within the same “controlled group” of businesses are allowed to participate. Put very simply (because the rules are complicated), the controlled group consists of different entities that share enough common ownership that they are treated as a single employer for employee benefits purposes. And all of those employers’ employees are able to participate in one plan.
In contrast, in an MEP, the employees of unrelated employers — i.e., those falling in two or more controlled groups — may participate in a single plan. The entities may share some ownership or control, but not enough to be treated as a single employer.
There are often good business reasons for allowing non-controlled group members to participate in a single pension plan. But circumstances change, and the time may come when it’s appropriate for an unrelated employer to leave. It often makes the most sense for the MEP to distribute benefits to those employees, allowing the plan to cut ties with the unrelated employer, and avoid having to keep track of the employment status of all those unrelated employees.
Assuming there is no other distributable event, there are three options to consider:
- Complete plan termination
- Partial plan termination
- Spinoff termination
Complete Plan Termination
A plan termination is a distributable event. Generally, an employer leaving an MEP does not constitute a plan termination, because there’s just one plan and it will still be around even after the unrelated employer leaves. However, it is possible under the Tax Code and the Employee Retirement Income Security Act of 1974 (ERISA) for an MEP to technically consist of a collection of separate plans, as opposed to a single plan. In such a case, the withdrawing employer could be treated as having its own individual plan, and that plan could be terminated and the assets distributed, provided such actions are consistent with the plan and trust documents.
Separate plans will exist under the Tax Code if the plan’s assets are not available to satisfy the benefits of all participants and beneficiaries. In other words, the assets must be segregated in some way, such that some assets are designated and may only be used to pay the benefits of the employees of the unrelated employer. This is not typically the case, however.
ERISA applies to most plans sponsored by private employers (but not to governmental plans and certain church plans). Under ERISA, if an MEP is a defined benefit plan, then separate plans may exist if either: (1) the assets are segregated and not available to pay the benefits of all participants and beneficiaries, just as with the Tax Code; or (2) the participating employers do not share common ownership, i.e., an “employment-based common nexus or other genuine organizational relationship that is unrelated to the provision of benefits.” With respect to defined contribution plans, the U.S. Department of Labor modified its regulations in late 2019 to make it easier for some otherwise unrelated businesses to form an MEP known as a “association retirement plan.” Generally, to be treated as a single plan, these employers need only form a bona fide organization that has a substantial business purpose and either the employers operate in the same trade, industry, or profession, or they have a principal place of business in the same geographic region. See 29 C.F.R. § 2510.3-55. If these loose restrictions are not met, separate plans will still exist.
Keep in mind, there may be numerous other issues to consider. For example, if the MEP should have been treated as a collection of separate plans under ERISA but has not been, then the participating employers could have potential liability for failing to comply with their reporting obligations, such as the filing an Annual Report (Form 5500). Also, notice to the Pension Benefit Guaranty Corporation (PBGC) may be required under Section 4043 of ERISA (29 U.S.C. § 1343), and it could result in an assessment of liability against the leaving employer under Section 4063 of ERISA (29 U.S.C. § 1363).
Partial Plan Termination
Assuming — in all likelihood — that an MEP constitutes a single plan, a partial termination could occur when an employer ceases participating in the plan. This is determined based on all the facts and circumstances. While there is no bright-line test, if 20 percent or more of the participants are excluded from further plan participation, a partial termination is likely to have occurred, although there may be disputes as to the most appropriate method of calculating the turnover percentage, or as to other relevant facts. While this 20-percent rule of thumb technically only applies to ERISA plans, it nonetheless provides a good framework for non-ERISA plans as well.
If it’s unclear whether a partial termination has occurred, the plan sponsor of the MEP could ask for the IRS’ opinion. This is accomplished by filing Form 5300 (Application for Determination for Employee Benefit Plan) with the IRS. The plan sponsor would provide the basic facts and a description of why it believes a partial termination has occurred (or might occur in the future).
If a partial termination occurs, then benefits for the affected employees must become nonforfeitable (to the extend funded), and any previously unallocated funds must be “allocated” to the affected employees. This allocation “may be in cash or in the form of other benefits provided under the plan.” See Treasury Regulations 1.401-6(b)(2)(ii), 1.411(d)-2(b)(2)(ii). Thus, the rules permit, but do not require, a distribution of benefits to affected participants upon a partial termination, so long as that distribution is consistent with the plan document. If the MEP does not provide for benefit distributions, it could likely be amended to so provide.
Just as with a complete termination, other issues may arise under the Tax Code and ERISA, such as notice to the PBGC (Form 10) and liability for the withdrawal of a “substantial employer.”
Spinoff Termination
If there is neither a complete termination nor a partial termination (and again, assuming there is no other distributable event), the only option is to spin off the withdrawing employer’s participants into a new plan (sponsored by the unrelated employer or another entity in its separate controlled group), which can then be terminated and assets distributed. This would likely be the most expensive option, as it would first require the creation and establishment of an entirely new plan, as well as additional coordination between the MEP and the unrelated employer leaving the plan. But it may be the only option.