Multiple and Pooled Employer Plans: What’s Right for Your Small Business?

Some smaller organizations may forgo starting a 401(k) plan for their company at the thought of the potential expenses needed to implement and maintain the plan, or due to the legal exposure that comes with sponsoring a 401(k) plan. As a result of these concerns, the concept of the multiple employer plan (MEP) was created.

MEPs were established to help smaller organizations provide retirement benefits to their employees, without incurring significant costs, and limiting the fiduciary responsibilities with maintaining a typical employer sponsored 401(k) plan. When initially established, there were two types of MEPs offered: closed and open MEPs.

The closed MEP was designed so that only employers that shared some commonality (same industry, geographic region, etc.) could participate in the MEP. The benefit of this form of the MEP is that the Internal Revenue Service (IRS) and Department of Labor (DOL) viewed the MEP as just one plan, and therefore were only required to file one annual tax return (Form 5500), which decreased the burden on the individual employers. The main issue with the closed MEP is, unless you belong to an association, it can be difficult to find employers that share the commonality to form the MEP.

The open MEP removed this restriction of the commonality, meaning employers from different industries and geographic areas could come together to form the MEP. The downside? The IRS and DOL did not view each employer as one plan, and the employers would each be required to file their own Form 5500. With this requirement, the DOL states that they are responsible for satisfying the requirements set forth under the Employee Retirement Income Security Act of 1974 (ERISA) of maintaining their own plan, which would give employers added fiduciary liability.

To remedy this, in December 2019, the SECURE Act was signed into law, which established a new form of open MEP, the Pooled Employer Plan (PEP). It has the benefit of allowing employers with no commonality to come together to form the plan, and is also recognized as only one plan by the IRS and DOL. There are some additional questions relating to PEPs that are addressed as follows:

Who has the fiduciary responsibility for the PEP? There will be someone appointed by the PEP to be the Pooled Plan Provider. This person will have ultimate fiduciary responsibility to manage the plan investments and make decision on behalf of the plan. The Pooled Plan Provider can be one of the participating employers, or can be an unrelated third party, such as an insurer or financial institution that meets certain qualifications.

Do the participating employers still have any fiduciary responsibility? Short answer is yes. But, the employers do not have the same level of exposure as under a standard 401(k) plan. The main responsibility the employers have under a PEP is to ensure that the Pooled Plan Provider is properly managing the plan, which can be done by reviewing annual plan compliance reports, as well as reviewing investment performance analysis. If the PPP appears to be not fulfilling their fiduciary duties, it is on the participating employers to ensure they replace the PPP with a more qualified option as soon as possible.

There is only one Form 5500 required to be filed. Is there only one annual compliance testing that needs to be performed? Unfortunately, each participating employer has to have annual testing performed for their employees to ensure they are in compliance with the current structure of the plan.

Does a PEP require a plan audit if they have over 100 eligible participants at the beginning of a plan year, similar to that of a standard 401(k) plan and MEP? Technically no. The DOL has established that a PEP is required to have a plan audit if: a) there are over 1,000 eligible participants at the beginning of the plan year OR b). one participating employer has over 100 eligible participants at the beginning of the plan year.

Are there any downsides to the PEP? There are a few significant issues that come with the PEP. They are:

  • The PEP is still very new and has not had time to really work out issues that may arise
  • As there are potentially a number of employers in different industries and of varying sizes, the fund options and plan specifics will most likely be less flexible, as to not complicate Form 5500 reporting
  • If the PEP does require a plan audit, there is a chance it will cost significantly more than a normal 401(k) audit, as each participating employer may have different processes, payroll periods, payroll providers, etc. So, though the cost may be spread out to all the participating employers, it would create expenses that some of the smaller participating employers would not have had to incur had they not been part of the PEP.

What is the effective date PEPs can begin to be formed? PEPs are allowed be formed with an effective date on or after January 1, 2021.

There are several nuances to consider when weighing the options of what type of retirement options are available to you as a small-sized employer. The experts at SST are equipped and available to help your business navigate this process with your goals in mind. Contact us today for more information.