Final rules governing multiple employer plans (“MEPs”) are now on the table, leaving many small business owners wondering both what they should do to take advantage of the new rules and what they need to consider before jumping in.
Small business owners have a wide variety of retirement planning options to choose from, but the MEP is one that can offer the chance of minimizing the fiduciary risks and administrative expenses associated with providing employees with a 401(k) savings option. Despite the fact that the expanded rules may, at first glance, seem entirely advantageous, however, MEPs still pose potential pitfalls that must be considered—and employers should also consider the evolving retirement legislation proceeding through Congress before employers leap into MEPs.
How MEPs Expand Small Business Retirement Options
The new MEP regulations expand the availability of the MEP structure—which was previously limited to small businesses with a strong connection, such as those operating in the same industry—so that small business owners can now join with other entities to share in the costs and burdens of providing a qualified retirement plan if they merely operate in the same general location. The participating employers can be located in the same city, county, state or even multi-state region. Companies operating in the same industry can join together even if they operate in entirely different regions.
Under the rules, either a permitted group of employers or a professional employer organization (PEO) can act as the “plan sponsor” of the MEP, which must operate as a defined contribution plan such as a 401(k). Procedurally, the group of employers can join together to form an association, which must be a bona fide organization with operational documents and a substantial commonality of interests unrelated to providing the retirement benefits (shared locality is sufficient; the common interest need not be the “primary” interest in forming the MEP)—meaning that the regulations declined to adopt the “open MEP” approach.
The employer-members of the association must control its activities and any employers that participate in the MEP must control the MEP in substance and in form, directly or indirectly. Only employees of the association’s employer-members and certain working owners may participate in the MEP.