What Is a Multiple Employer Trust and How Does It Work?
Understand the strategic financial structure where multiple employers combine assets for collective advantages.
Multiple Employer Trusts (METs) are financial arrangements allowing businesses to pool resources for collective employee benefits. This approach helps achieve more robust programs and improved administrative processes.
Defining a Multiple Employer Trust
A Multiple Employer Trust (MET) is a legal arrangement where ten or more unrelated employers unite to form a single trust. This structure primarily facilitates employee benefits, with a significant emphasis on life insurance, while aiming to minimize tax implications. METs were authorized under Internal Revenue Code Section 419, allowing employers to pool resources.
A MET involves a trust agreement defining its terms and the responsibilities of a designated trustee. This single trust serves all participating employers, fostering economies of scale and administrative efficiencies. The legal structure mandates specific rules, such as no single employer contributing more than ten percent of the total funding for the benefit plan. The MET must also operate as an indivisible entity, ensuring all participating employers share equally in any benefits or forfeitures.
Contributions made by employers to a MET for life insurance plans are typically tax-deductible. However, any amounts considered “bonus” life insurance must be reported as taxable income by the employee. This structure differentiates a MET from a Multiple Employer Welfare Arrangement (MEWA), as METs generally focus on life insurance and are typically not subject to the Employee Retirement Income Security Act of 1974 (ERISA). MEWAs often provide broader welfare benefits like health care and pensions and fall under ERISA regulations.
How Multiple Employer Trusts Operate
METs operate through a structured administrative process to manage pooled resources. Oversight is typically handled by a board of trustees or by third-party administrators. These entities manage the trust’s assets and ensure compliance with the trust agreement. The collective pooling of contributions allows the MET to negotiate more favorable terms and rates with insurers and benefit providers than an individual employer could achieve alone.
To maintain tax benefits, METs must adhere to specific Internal Revenue Service (IRS) guidance, such as IRS Notice 95-34. This guidance outlines conditions for tax deductibility, particularly concerning severance benefits. Non-compliance can result in the denial of an employer’s tax deduction if arrangements appear to provide deferred compensation.
The trust facilitates the delivery of benefits to employees by treating them as if they worked for a single, larger entity for benefit purposes. This consolidated approach simplifies administration and can lead to more robust benefit packages.
Participation and Eligibility
Multiple Employer Trusts are designed to attract small to medium-sized businesses that might otherwise struggle to provide competitive employee benefits independently. Eligibility includes a rule that no single employer can contribute more than ten percent of the total funding for the benefit plan, which helps maintain an equitable distribution of contributions and prevents any one employer from dominating the trust.
Employers typically join a MET to gain access to more affordable and comprehensive benefit options, particularly life insurance, which can be challenging to secure individually due to higher costs or administrative burdens. The process for an employer to join involves entering into formal agreements with the trust and completing necessary applications. These agreements outline the employer’s responsibilities, contribution amounts, and adherence to the trust’s operational guidelines.
The direct implication for employees of participating employers is that they gain access to benefits through their employer’s involvement in the MET. This arrangement allows employees to receive life insurance coverage that might be more robust or cost-effective than what their employer could offer if acting alone. The pooled resources and streamlined administration of a MET contribute to the ability of small and medium-sized businesses to offer more attractive compensation packages, thereby enhancing their competitiveness in the labor market.