It didn’t mean to be a MEWA. It just. . .sort of happened.
It’s not uncommon for one company in a controlled group, such as the parent organization, to sponsor the group’s welfare plan with the other members adopting the plan as participating employers. A single welfare plan for the group can make economic and administrative sense. Better pricing on insurance coverages, streamlined administration of self-insured benefits, consolidated Form 5500 filings, and sometimes a common payroll, are all important factors when a controlled group considers whether to have a single plan.
That’s all fine where there is a controlled group that can be treated as a single employer for purposes of a welfare plan. But what happens when the group is not actually a single employer under the IRS related employer rules? A misunderstanding or a change in ownership could mean that there are actually multiple employers participating in a single welfare plan; what if no one realizes this or its impact on the welfare plan?
What is a MEWA? A MEWA is a “multiple employer welfare arrangement.” Basically, that is where a single plan, offering welfare benefits, is providing those benefits to the employees of unrelated employers. By “unrelated,” we don’t necessarily mean completely unrelated—this also happens where employers have some common ownership, but not in a sufficient amount to be treated as a single employer under the IRS rules.
How can a plan unintentionally become a MEWA? There are many ways that a welfare plan that is intended to be a single employer plan can become a MEWA without even trying. For example:
- Company A has several wholly-owned subsidiaries. Company B comes in and buys up some of the stock in one of Company A’s subsidiaries, sufficient to cause Company A’s ownership to fall below the 80% threshold required for common controlled group status. The welfare plan is now covering companies in two separate controlled groups and so is now a MEWA.
- Company C has several subsidiaries and is part of conglomerate that includes a group that is in the same controlled group as Company C (Group 1) and a group that does not have sufficient common ownership with the entities in Group 1 and so is a separate controlled group (Group 2). For tax purposes, the corporate department moves a subsidiary of Company C from Group 1 to Group 2. Company C’s welfare plan is now covering employers in two separate controlled groups, and so is now a MEWA.
- There is a group of three companies with some common ownership and a single payroll master, but no one ever did a controlled group analysis. The owners just assumed they could offer a single welfare plan to all of the employees on the payroll. Unknown to them, under the IRS rules, there is not sufficient common ownership among the entities for a parent-subsidiary controlled group or a brother-sister controlled group to exist between any two employers in the “group.” The single welfare plan is now covering companies in three separate controlled groups and has been a MEWA from Day One.
In real life, this disconnect can easily happen where the corporate side of things is focusing on reorganization or transactions, and does not think to loop in human resources or benefits counsel. It can also happen where a company makes assumptions and does not engage in an actual analysis of its single employer status from the beginning and/or when there is a change affecting its ownership or structure.
Why do we care that it’s a MEWA? MEWAs have a tawdry past, rife with abuse and fraud. As a result, the DOL and states have created extra requirements and restrictions for MEWAs. And if you don’t know you have a MEWA, then how can you meet these requirements and restrictions? And are you even permitted to have a MEWA? Some things to be aware of:
- Federal Filing. Most MEWAs must file a Form M-1 with the DOL at least annually, and the penalties for failure to file are pretty stiff.
- State Filings. Each state in which the MEWA covers employees may have its own filing requirement. The coverage goes with the location of the worker, not the employer; with more and more telecommuting becoming the norm, this could mean having to know and satisfy the filing requirements of many states.
- State Restrictions. A particular state may also have insurance restrictions that effectively prohibit MEWAs in that state. For example, until recently, California prohibited large group coverage of a small employer, even if that small employer was participating in a single plan with a large, but unrelated, employer.
- State Regulation of a Self-Insured MEWA. If a MEWA includes a self-insured health plan, then that health plan is subject to each applicable state’s insurance regulations, like any insurer registered in that state. That’s a whole other set of headaches.
- Insurer Contractual Restrictions. Some insurance companies won’t issue policies to MEWAs, so if coverage is set up for a single employer group, that coverage may be at risk once the information on the application is no longer accurate.
- Risk of Tax Disqualification. Cafeteria plans (pre-tax premium payment, flexible spending accounts, etc.) generally cannot be multiple employer plans. While the published guidance does not directly address this issue, it is best practices to have separate cafeteria plans for each controlled group. Avoiding the minimal costs of establishing and administering separate cafeteria plans is not worth the risk of having a disqualified cafeteria plan.
What should a plan sponsor do? Unlike the impact of multiple employer status on a retirement plan, which generally requires special plan provisions and some testing adjustments but is otherwise manageable, multiple employer status has a significant impact on welfare plans.
In order to either avoid MEWA status or comply with it, plan sponsors must first know that they are a MEWA. This requires:
- A current related employer analysis under the applicable IRS regulations to accurately determine whether the group is a single or multiple employer for benefits purposes.
- An updated related employer analysis at any point where there is a change in ownership or organization.
- Communication between the corporate groups and the benefits groups within the employer entities. Corporate leaders needs to be aware that changes in ownership or organizational structure can affect benefits, and the benefits staff need to be brought in as early as possible to assess the impact and take needed actions.
If an inadvertent MEWA exists, the plan sponsor needs to take action:
- File Form M-1 for current and prior years. While there is no delinquent filer relief program at this point, late Form M-1s can be filed with a statement of reasonable cause and penalties may be waived.
- Consider splitting the welfare plan into separate plans for each related group of employers. Especially cafeteria plans and self-insured health plans.
- If a MEWA is to be maintained on a going-forward basis:
- Consult with the insurance broker to determine whether the insurer will issue a policy to a MEWA and what the effects MEWA status has on existing policies.
- Determine the states in which coverage is offered, and the corresponding requirements and restrictions. This determination will need to be updated as necessary.
- Update administrative procedures to maintain compliance with state and federal requirements.
- Update plan documents as applicable.