The Impact of the SECURE Act on Multiple Employer Retirement Plans
posted by Fisher 401(k) May 19, 2020
A Multiple Employer Plan (MEP) is a type of 401(k) plan in which a group of companies unrelated for income tax purposes decide to join together by adopting in a single plan. Many companies, particularly small businesses, don’t have the resources to administer a retirement plan on their own, a MEP allows them to pool resources for more efficient administration and potentially better pricing.
Previously the Internal Revenue Service (IRS) and Department of Labor (DOL) allowed MEPs but they had strict guidelines – particularly requiring a nexus between the adopters that limited the use of MEPs. Now, MEPs or “Pooled Employer Plans” are more accessible to employers with the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 (the "Act").
MEPs have been around for many years, and have been widely used by trade associations looking to provide a simple, turn-key retirement plan solution to their member employers. Each MEP is organized and run by a MEP Sponsor, (i.e. trade association) who assumes the fiduciary responsibility for administration and overall management for the plan. Companies that join a MEP are referred to as “Adopting Employers.”
Legislators have recognized for years that MEPs could help increase the number of companies offering retirement plans to their employees. But over the years, burdensome and sometimes conflicting regulations from the IRS and DOL created confusion that resulted in low adoption rates for MEP 401(k) plans. The two biggest issues were:
(1) to participate in a MEP, employers had to share some nexus or interest unrelated to the retirement plan, such as being in the same industry or geographic location, or members of an established trade association (the “commonality” requirement), and
(2) the violation by one employer of any DOL or IRS code provision, such as a late deposit of salary deferrals, could make the entire plan noncompliant and create liability for an adopting employer (the “One Bad Apple” rule).
PRE-SECURE ACT MEPs: CLOSED MEPs AND OPEN MEPs
A traditional MEP established through commonality of trade is commonly referred to as a “Closed MEP.” In the early 2000’s, the term “Open MEP” was coined to define retirement plans established and sponsored by non-traditional recognized trade associations. They were offering small employers the opportunity to join a MEP without a nexus of industry or trade. But, on May 25, 2012, the Department of Labor (DOL) issued Advisory Opinion 2012-03A and Advisory Opinion 2012-04A (collectively, Advisory Opinions) that address the legitimacy of so-called "Open" multiple employer plans (Open MEPs) under ERISA. They determined in these Advisory Opinions that in fact they did not satisfy requirements of a single employer plan for purposes of ERISA. Legislative action would be required to amend this regulatory roadmap.
THE SECURE ACT EXPANDS MEPS AND CREATES NEW ONES
With a mission to increase savings and to expand plan coverage in the US, The SECURE Act was passed and signed into law on December 20, 2019 and became effective as of December 31, 2019 (although not every provision was implemented on that date). The Act makes it easier for employers, particularly small employers, to offer workplace retirement plans.
The Act makes MEP adoption easier by removing the commonality requirement as well as the “one bad apple” disqualification rule. Under the Act, traditional (Closed) MEPs may still be maintained, but the intent of Open MEPs was finally achieved through the elimination of the commonality requirement in a new type of MEP, referenced in the Act as a Pooled Employer Plan (PEP). The Act has thus put a renewed focus on MEPs … and added a few more acronyms for retirement plans:
SECURE Act – Changes to MEPs or Multiple Employer Plans
The Act eliminated the risk of the “one bad apple” rule (26 CFR 1.413-2(a)(3)(iv)) by permitting the plan to implement a process for removing the out-of-compliance adopting employer from the plan. The terms of the MEP should provide:
a. the assets of a non-compliant plan will be transferred to (i) a plan maintained solely by the noncompliant employer, (ii) an eligible retirement plan for each participant, or (iii) another appropriate arrangement (unless transfer is determined not to be in the best interest of plan participants); and
b. the noncompliant employer will be liable for any liabilities of such plan attributable to the employees of such employer.
SECURE Act – Creates a PEP or Pooled Employer Plan
A PEP (formerly referred to as “Open MEP”) is a new form of defined contribution MEP. It does not require commonality among the adopting employers. PEPs are generally subject to the same ERISA and IRS rules as a single employer plan like the traditional MEP. A PEP will qualify as a MEP and all the benefits of operating as a single plan, including filing one consolidated Form 5500, as long as the PEP is sponsored by a qualified Pooled Plan Provider (PPP) who assumes overall fiduciary responsibility for the plan management and its assets
SECURE Act – Creates a PPP or Pooled Plan Provider
A PEP must hire a Pooled Plan Provider (PPP) to qualify as a MEP. A PPP may be an individual or entity (such as a TPA, insurance company, mutual fund manager, or adviser). PPPs are responsible for performing all administrative duties (including conducting proper testing with respect to the plan and the employees of each employer in the plan). For a PPP to be qualified, the following conditions must be met:
- The PPP must acknowledge in writing in the plan documents that it is a named fiduciary and the plan administrator, and it must accept full responsibility for the plan meeting the terms of ERISA and the Internal Revenue Code.
- The PPP must register with the IRS and the DOL as a PPP.
- The participating employers must agree to provide to the PPP the information needed to properly operate the plan.
- The PPP must make sure that all parties handling plan assets are bonded.
PEP/PPP KEY CONSIDERATIONS
Similar to the administration of a traditional MEP, employers adopting a PEP (Pooled Employer Plan) are treated as the sponsor of the plan with respect to their employees, except for duties assumed by the PPP (Pooled Plan Provider), and should be aware of the following:
- PEP Plan Review: When selecting a PEP, employers should consider the fees of the PEP, as well as the level of services and flexibility offered to adopting employers. Employers will also want to make sure they can leave the plan easily and have their portion of the plan spun off either to convert to an individual plan or be transferred to an alternate MEP/PEP.
- Your Fiduciary Responsibility: Each adopting employer retains fiduciary responsibility for selecting the PPP, and other named fiduciaries. (This is similar to MEP adoption).
- Nondiscrimination Testing: Testing is applied separately to each adopting employer. It is not applied across the PEP in aggregate. This means each employer must pass nondiscrimination testing (i.e. ADP, ACP, Top Heavy tests) based on its own plan participants and plan contributions.
- Filing Form 5500: A PEP files a single Form 5500 annual report (rather than a separate report for each participating employer).
- Plan Assets: Plan assets are held in a commingled trust. In other words, there is no segregation of assets by employer in the plan trust.
- “One bad apple”: If a non-compliant employer is found, its portion of the PEP must either be restored to compliance or spun off from the PEP. So long as it is remedied, a non-compliant adopter will no longer potentially disqualify the entire plan.
IS A PEP AN OPEN MEP?
Technically, yes. The term “Open MEP” is trademarked by the organization who originally filed for the 2012 Advisory Opinions. The term defined in the Act is “Pooled Employer Plan” and the retirement industry has embraced it. With the removal of the commonality requirement PEPs now permit small businesses that don't share the same geographic area or a common trade, industry or profession to participate without the fear of the arrangement being treated as multiple component plans for ERISA purposes.
WILL MEP GROWTH TAKE OFF?
Prior to the Act, MEPs were viewed as difficult to set up and administer, and the potential liability that an employer could be subjected to as the result of intentional or negligent actions of other employers in the MEP caused many employers not to choose one. The elimination of the commonality requirement and ”one bad apple” liability risk removes significant stumbling blocks for employers to join MEPs. The advantage of employers joining into a single plan offers the potential for lower recordkeeping, asset management and other administrative costs. The aggregation of participants’ assets can result in a larger plan, which typically has more bargaining power with service providers and asset managers than small plans. Further, being treated as a single plan allows the MEP/PEP to file a single Form 5500, obtain one qualified plan audit, and maintain a single ERISA bond. This can further reduce plan overall costs.
TIMING TO IMPLEMENTATION AND REGULATORY OVERSIGHT
While these new rule changes might seem daunting, employers contemplating participating in a MEP or PEP have time to research their options. The provision of the Act addressing PEPs takes effect for plans years beginning January 1, 2021.
The delay provides time to the industry and service providers to innovate new product solutions as well as time for the DOL and IRS to issue further guidance for areas such as Prohibited Transactions for Pooled Plan Providers, disclosures, correction procedures and the preparation of a model plan document.