Compliance August 25, 2020

Investors Seek More Substantive PEP Guidance from DOL

Though they applaud the direction the Department of Labor is taking, expert ERISA attorneys say a new proposed rule does not sufficiently explain how pooled employer plans can be structured like existing multiple employer plans.

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Last week, the U.S. Department of Labor (DOL) published a Notice of Proposed Rulemaking (NPRM) that seeks to implement various registration requirements for emerging pooled plan providers, pursuant to the Setting Every Community Up for Retirement Enhancement (SECURE) Act.

At the end of 2019, the passage of the SECURE Act amended the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC) to establish a new type of multiple employer plan (MEP) called a pooled employer plan, or “PEP,” that must be administered by an entity called a “pooled plan provider.” The SECURE Act allows pooled plan providers to start operating PEPs beginning on January 1, 2021, but it also requires pooled plan providers to register with the Secretary of Labor and the Secretary of the Treasury before they begin operations.

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One important part of the proposal is the creation of a new Form PR, which will serve as the primary registration form for pooled plan providers. Under the proposal, Form PR must be filed electronically with the DOL no earlier than 90 days and no later than 30 days before an entity begins operations as a pooled plan provider, which the proposed regulation defines as “publicly marketing services as a pooled plan provider or publicly offering a pooled employer plan.” This means that activities such as filing for a tax identification number or adopting a business plan are not taken into account for registration purposes.

Now that they have had some time to digest the DOL’s proposed registration rulemaking, expert ERISA attorneys are offering their initial analysis. In commentary shared with PLANSPONSOR by Barry Salkin and Susan Rees, both of counsel at the Wagner Law Group, the attorneys applaud the DOL and Treasury leadership for proposing this registration guidance well ahead of the date that pooled employer plans may be established. However, they say, even more substantive guidance is needed on how pooled employer plans and pooled plan providers are to operate. The attorneys are concerned that the DOL has not and may not sufficiently explain the differences between existing MEP types and the new type of PEP authorized by the SECURE Act.

“On that, the DOL tells us that although it does not have specific details as to how pooled employer plans authorized under the SECURE Act will be structured and operated, the DOL has assumed that such plans ‘may be similar to other currently operating multiple employer plans,’” Salkin and Rees write. “Additionally there may be [additional] challenges associated with these new types of plans that the DOL, the Treasury Department or Internal Revenue Service [IRS], as the federal agencies charged with oversight of private-sector pension plans, may need to address.”

The Wagner attorneys say it is sensible that the DOL is at this stage being candid about the lack of guidance currently available. This is a new and evolving area and the DOL, under the leadership of President Donald Trump and his appointees, is seemingly interested in allowing the business community to innovate in this area with relatively little prescriptive direction. But the clock is ticking, the attorneys warn, and they will be watching closely for more fleshed out information about how pooled employer plans can be structured like existing multiple employer plans.

According to the Wagner attorneys, a key sticking point is the fact that the DOL proposal’s preamble states that the SECURE Act’s “one bad apple” relief is only available to multiple employer plans that comply with the SECURE Act. To this end, the attorneys say, there is still “major operational confusion” for existing multiple employer plans that must be resolved. Given the lack of specific guidance in the new proposed regulations, the attorneys say, it stands to reason that PEPs and their operators will face similar confusion as they seek to get moving in early 2021.

“The [DOL proposal’s] preamble asks for comment on additional types of information to require on the Form PR,” the Wagner attorneys note. “For instance, the DOL asks if it would be useful to employers for the pooled plan provider to report investigations by and/or informal settlements of fiduciary matters with the DOL and the PBGC [Pension Benefit Guaranty Corporation]. These suggestions or other comments on the proposed regulation are due on or before 30 days after its publication date in the Federal Register.”

Even as ERISA experts voice such concerns, the retirement plan services industry is gearing up for the emergence of PEPs. Several weeks ago, for example, Aon and Voya Financial announced plans to team up to launch a pooled employer plan of the type authorized by the SECURE Act. Aon will technically operate the PEP, while Voya Financial will serve as the recordkeeper for the new plan. The firms say they are on track for a January 1 launch date.

Echoing the language used by regulators to explain why such plans are appealing, Aon’s and Voya’s leadership say the PEP will relieve employers of many fiduciary duties they have today. Due to the economies of scale, it also has the potential to lower fees for plan participants and provide access to state-of-the-art features that may be difficult for individual employers and fiduciary committees to both assess and access independently, they say.

According to David Kaleda, a principal in the fiduciary responsibility practice group at Groom Law Group, in deciding whether and how to work with PEPs, advisers should consider a number of issues. For example, participating employers act as fiduciaries in selecting and monitoring any party that acts as the PEP’s named fiduciary; thus, employers likely will evaluate a number of pooled plan providers before selecting a PEP. Also, the PEP must have a trustee that is a financial institution responsible for collecting plan contributions and assuring plan assets are held in trust. The PEP must be registered and meet a number of requirements in the statute, which will be affected by future DOL and Treasury regulations and guidance.

Ask the Experts August 25, 2020

Can Nonresident Aliens Be Excluded From Deferring in 403(b)s?

Experts from Groom Law Group and Cammack Retirement Group answer questions concerning retirement plan administration and regulations.

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“We are a private health care organization which sponsors an Employee Retirement Income Security Act (ERISA) 403(b) plan. Can we exclude nonresident aliens from the right to make elective deferrals to our plan?”

Stacey Bradford, Charles Filips, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

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The Experts are glad you asked this question, as this is a common area of error in administering the universal availability requirement for 403(b) plans. Many plan sponsors subject to that requirement erroneously believe that they can exclude ALL nonresident aliens from the right to make elective deferrals when, in reality, they often cannot exclude ANY nonresident aliens from the right to make elective deferrals.

Let’s take a look what the Internal Revenue Code says here. Section 403(b)(12)(A)(ii) provides that “…there may be excluded any employee who is a participant in an eligible deferred compensation plan (within the meaning of section 457) or a qualified cash or deferred arrangement of the organization or another annuity contract described in this subsection. Any nonresident alien described in section 410(b)(3)(C) may also be excluded…”

So now we need to look at Section 410(b)(3)(C), which provides that “…employees who are nonresident aliens and who receive no earned income (within the meaning of Section 911(d)(2)) from the employer which constitutes income from sources within the United States (within the meaning of Section 861(a)(3)).”

Section 911(d)(2)(A)’s definition of earned income is fairly straightforward:

“[T]he term ‘earned income’ means wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered, but does not include that part of the compensation derived by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered.”

The definition of earned income under Section 911(d)(2)(A) generally corresponds with the traditional definition of wages under Section 3401(a). It turns out that, for the most part, income from sources within the United States under Section 911(d)(2) is fairly straightforward as well—generally it is income earned while working in the United States (commonly referred to as “U.S. Source Income”).  However, Section 861(a)(3) excludes from U.S. Source Income compensation paid for personal services performed in the United States by nonresident aliens who are (a) present in the United States for a period not exceeding 90 days during the taxable year, (b) paid less than $3,000 during the taxable year for their services, and (c) performing services for a nonresident alien or a foreign entity; or performing services for a U.S. entity or resident if such services are performed for an office or place of business maintained in a foreign country; or performing services in connection with a temporary presence in the United States as a regular crew member of a foreign vessel engaged in international transportation.

As such, a nonresident alien will likely have U.S. source income unless they are in the U.S. on a very short term basis (less than 90 days) and are paid less than $3,000 for their services during the taxable year. Thus, for most 403(b) plan sponsors, nonresident aliens performing services in the U.S. must be allowed to make elective deferrals to a 403(b) plan. If the nonresident alien is NOT employed in the U.S., he/she may be excluded, but this is not a common scenario among entities that sponsor a 403(b) plan.

Now, just because nonresident aliens CAN make deferrals to a 403(b) plan doesn’t necessarily mean that they SHOULD defer. Due to their special tax circumstances, and the fact that such employees are generally not in the U.S. for a period long enough to derive a benefit from saving in a retirement plan, many such employees may not elect to defer even if given the opportunity. However, absent another exception to the universal availability rule, they must generally be given the opportunity to make elective deferrals to a 403(b) plan.

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Rebecca.Moore@issgovernance.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future Ask the Experts column.

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