Beginning in 2021, small-business clients will have even more options for providing retirement benefits to employees.
The Secure Act removed the commonality of interest requirement that previously limited multiple employer plans (MEPs) to business owners who shared the same geographic location or industry—creating a new type of MEP. Under the Secure Act, employers will be able to offer MEPs, association retirement plans (ARPs) and pooled employer plans (PEPs).
While it can be generally said that ARPs and PEPs are simply expansions on the MEP, small business clients who wish to explore options for joining with other businesses to offer retirement benefits should understand the nuances of all three structures before jumping into the MEP pool.
Multiple Employer Plans (MEPs): The Basics
Historically, to participate in MEPs, all participating employers were required to share some strong type of common interest separate and apart from the retirement plan itself. The need to share some type of affiliation or participate in the same industry sharply limited the availability of the “original” MEP—also called a “closed” MEP.
The basic premise behind the idea of MEPs has remained the same—multiple small businesses join together to reduce the administrative burden and potential fiduciary responsibilities of offering a 401(k)-type retirement plan. However, the DOL acted in 2019 to expand MEP availability if certain criteria are satisfied. Congress enacted the Secure Act to even further ease the restrictions on the types of employers who can join together, assuming additional criteria are satisfied, and eliminate some of the risks associated with MEPs.
Association Retirement Plans (ARPs): The 2019 DOL Regulations
In 2019, the DOL released regulations designed to expand access to MEPs. Some in the industry began referring to these new MEPs as association retirement plans (ARPs) to differentiate from the original “closed” MEP, and to clarify that ARPs must satisfy additional criteria in order to be treated as qualified plans. Essentially, the ARP is a type of MEP, and the terms have mostly been used interchangeably.
Under the ARP structure, employers that share only the same geographic location or industry are permitted to join together in the MEP. 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. The ARP can be sponsored by a permitted group of employers if certain formalities are satisfied (the organization of employers must be bona fide, with organizational documents and control over the MEP in substance and in form, directly or indirectly, among other requirements).
In the alternative, ARP members can now join together in a plan sponsored by a professional employer organization (PEO). When a PEO is used, that PEO must accept administrative responsibility for substantial employment-related duties, such as responsibility for paying wages to the participants’ employees, including all withholding and reporting responsibilities. The PEO must also have a role in recruiting, hiring and firing employees of the participating employers, and must play a substantial role in administering the employers’ benefit offerings.
While the 2019 regulations were broadly seen as beneficial to interested small business owners, employers who choose this type of plan structure may continue to be subject to the “one bad apple” rule, absent further guidance from the IRS or DOL.
Pooled Employer Plans (PEPs) Post-Secure Act
Building upon the momentum surrounding MEPs, beginning in 2021, the Secure Act permits MEP participation for employers who share no common interest apart from the desire to offer a retirement plan. The Secure Act also eliminated many concerns about the “one bad apple” rule by providing that the entire plan would not be disqualified based on a single participant’s actions.
Under the Secure Act, these types of MEPs are also called pooled employer plans (PEPs)—another name for a type of MEP that meets certain additional requirements to avoid the commonality of interest requirement and one bad apple rule. The PEP will be treated as a single retirement plan, so that the group will only be required to file a single Form 5500 to further reduce the administrative burdens for each of the individual employer-participants.
This type of “open MEP” must be administered by a pooled plan provider (generally, a financial services firm). Use of the pooled plan provider to act as both plan administrator and a fiduciary with respect to the plan is intended to ease both the administrative burden and fear of fiduciary liability for small business owners.
The pooled plan provider must register as a fiduciary with the Treasury Department and the DOL. The pooled plan provider also must have a trustee responsible for monitoring contributions and dealing with subsequent issues that arise.
Small business clients should understand that, as employer, they continue to bear fiduciary responsibility with respect to selecting and monitoring the pooled plan provider. Pooled plan providers can outsource investment decisions to another fiduciary (likely what is known as a “3(38) fiduciary”). This arrangement does spread the costs of investment advice among the MEP participants to reduce expenses, but the extent of the employer’s fiduciary exposure still remains unclear under the law.
The rapid evolution of the MEP in the past year has created a whole new cast of acronyms that small-business clients and industry professionals must learn. At the most basic level, ARPs and PEPs are a product of the MEP’s evolution, representing the loosening of MEP restrictions that has been granted in exchange for satisfying certain additional requirements under the new laws.