SECURE Act Opens Door to Pooled Employer Retirement Plans

Many smaller businesses are reluctant to offer 401(k)s or other qualified retirement plans to their employees because of their high costs, time-consuming administrative responsibilities, and strict fiduciary duties. But starting next year, it will be easier for employers to reduce these burdens by joining forces in a multiple employer plan (MEP).

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, signed into law late last year, is designed to head off the looming retirement saving crisis by improving access to tax-advantaged savings vehicles. One of the act’s most significant changes authorizes a new type of “open” MEP, called a pooled employer plan, or PEP. By eliminating some of the obstacles that make MEPs impractical for many employers, it’s hoped that PEPs will make the benefits of MEPs available to more employers than ever before.

Traditional MEPs: Benefits and Hurdles

MEPs offer significant benefits by (1) taking advantage of economies of scale and group purchasing power to reduce costs, (2) taking over many of the administrative tasks involved in maintaining a qualified plan, and (3) assuming some of the participating employers’ fiduciary duties. Participating employers may also gain access to the MEP provider’s expertise, superior technology, and other resources. Under current rules, however, there are significant hurdles to achieving these benefits. To fully enjoy the benefits of a MEP, participating employers must demonstrate a “commonality of interest” — that is, they must be in the same industry or geographical area or join a plan sponsored by a qualifying association or professional employer organization. These “closed” MEPs are treated as a single employer plan for annual reporting (Form 5500), annual plan audit, and other purposes.

Employers who lack a commonality of interest may join “open” MEPs, but these plans have significant drawbacks under current rules. The U.S. Department of Labor (DOL) takes the position that these employers maintain separate plans and, therefore, are responsible for their own plan documents, filings, annual audits, and other compliance obligations (including furnishing a bond to protect plan assets).

Another disadvantage of MEPs is the “one bad apple” rule, under which one participating employer’s compliance failure can jeopardize the entire MEP’s tax-qualified status. This rule, which applies to both open and closed MEPs, has deterred many employers from joining these plans. Regulations were proposed by both the Internal Revenue Service and the DOL recently to address this problem but they didn’t cover all MEP forms.

PEPs to the Rescue

The SECURE Act removes both of these obstacles by creating the PEP. A properly designed PEP will be treated as a single plan — with one plan document, one annual Form 5500 filing, and one annual plan audit — regardless of whether participating employers have any pre-existing connection or “commonality.” This makes truly open MEPs possible, allowing unrelated employers (including very small businesses) to share the benefits described above.

The act also eliminates the risks associated with the one bad apple rule: A PEP’s tax status will not be jeopardized by a participating employer’s compliance failure so long as its plan document contains specified procedures for dealing with such failures.

PEPs will be available from “pooled plan providers” (PPPs), including broker/dealers and other financial services companies, insurance companies, third-party administrators, and other firms that meet certain requirements. Among other things, a PPP must register with the DOL and U.S. Department of the Treasury, acknowledge in writing that it is the PEP’s named fiduciary and plan administrator, and ensure that all plan fiduciaries — including persons who handle plan assets — are properly bonded.

Do Your Homework

The SECURE Act’s PEP provisions are effective for plan years beginning after December 31, 2020, and given the expected demand for PEPs it’s likely they will become available early next year. If you’re considering a PEP (or even a traditional closed or open MEP) for your business, it’s important to do your homework and weigh the cost savings and other benefits against the benefits of maintaining your own individual plan. For example, individual plans provide greater flexibility to offer your employees customized investment options (including company stock) and other attractive features.

It's also critical to conduct thorough due diligence on the PEPs or other MEPs you’re considering. Different providers will offer different investment options, different degrees of flexibility in terms of plan design, different pricing structures, different technologies, and different capabilities. And keep in mind that even though the provider assumes many of the fiduciary duties associated with the plan, you will retain fiduciary responsibility for selecting and monitoring the provider.

Review Your Options

If your business doesn’t offer employees a 401(k) or other qualified retirement plan, or your current plan’s costs have become a burden, now’s the time to review your options. As retirement benefits become increasingly important to employees and prospective employees, the right plan can give you a competitive edge. The changes made by the SECURE Act will make it easier to offer high-quality retirement benefits at a reasonable cost.

Published in Retirement

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