Multiple Employer Plans (MEPs): A Low-Cost Retirement Plan for Your Small Business Clients

Jan 03, 2019

According to the Department of Labor (DOL), as of March, 2018, approximately 85% of businesses with 100 or more employees offer an employment-based retirement plan. However, only 53% of businesses with fewer than 100 do so. Some reasons smaller businesses choose not to offer a retirement plan include regulatory complexity, cost, and exposure to potential fiduciary liability. A multiple-employer plan (MEP) offers small businesses a way to offer a retirement plan without these drawbacks.

Multiple Employer Plans (MEPs) – An Overview

Rather than establishing a plan of its own, a business can choose to join together with other employers in a MEP. The entity that establishes the MEP is its sponsor, which typically designs the basic features of the MEP. These include the provisions that determine any waiting periods that employees must satisfy to participate, which types of contributions can be made to the MEP, when and in what form participants can take distributions from their account balances, whether loans and other optional features are available, etc.

The MEP sponsor also generally serves as the official plan administrator—the primary administrative fiduciary for the plan. It is the MEP sponsor that appoints the trustee and other service providers for the plan, communicates with participants regarding plan benefits, ensures compliance with regulatory rules, decides claims disputes and other plan issues, and determines available investment menus, among other duties.

MEPs Benefits for Smaller Employers

A MEP is a retirement plan managed by professionals who handle compliance with regulatory rules. Costs are lower for participating employers because the MEP sponsor is able to negotiate lower fees from service providers based on larger participant numbers and account balances. Much of the fiduciary and legal risk is transferred to the MEP sponsor and administrator. Employees who participate in the MEP have access to the same low-cost investment funds that large employers can offer. And smaller employers can more easily compete with larger companies in recruiting and retaining workers.

Responsibilities of Employers in a MEP

Adopting employers join the MEP by signing participation agreements. The participation agreements, or the terms of the MEP itself, typically describe the duties of the adopting employers versus those of the MEP sponsor.

At a minimum, adopting employers are responsible for ensuring the MEP sponsor is competent to administer a retirement plan, that the investments available under the MEP are prudent, and that fees are reasonable. Adopting employers should also periodically review the adequacy of the services performed by the MEP sponsor. This “due diligence” is critical because, under current law, if any adopting employer fails to satisfy the tax code requirements that apply to qualified retirement plans, the MEP as a whole is at risk of losing its tax-qualified status to the detriment of all adopting employers. This is known as the “one bad apple” rule.

Closed MEP vs. Open MEP

There are two types of MEPs: “closed” MEPs and “open” MEPs.
  • Historically, in a closed MEP, adopting employers have sufficient employment-based common interests (“commonality”) so that the MEP is treated as a single plan by the DOL.
  • In an “open” MEP, that commonality is missing, and the DOL treats each adopting employer as having established its own plan.
The costs of a closed MEP will generally be lower than that of an open MEP, because a closed MEP  files reports for the plan as a whole. An open MEP files individual reports for each adopting employer. Closed MEPs also require only one audit and purchase a single ERISA bond, while open MEPs may have multiple audits and the required ERISA bond must take into account the assets of each adopting employer’s  plan.

Both closed and open MEPs, though, can leverage size to negotiate lower fees and secure lower-cost investment funds, and both types assume much of the adopting employer’s fiduciary risk.

Proposed Regulations and Legislation

In August 2018, the Trump administration issued an executive order that called on the DOL and the IRS to create new regulations that could make it easier for small businesses to join and participate in a MEP. In response, the DOL recently issued proposed regulations that provide additional guidance regarding the types of entities that may sponsor a defined contribution closed MEP. Under those proposed regulations, a closed MEP may be sponsored by a bona fide group or association of employers that satisfies a somewhat relaxed “commonality” requirement, or it may be sponsored by a bona fide Professional Employer Organization (PEO).

A bona fide group or association of employers is a group of employers that share certain employment- based interests. Among other things, it must have a formal organizational structure, be controlled by its employer members, and have at least one business purpose other than offering benefits to the employees of its members.
Employers who adopt the MEP must either:
  • Be in the same trade, industry, line of business, or profession
  • Or have a principal place of business within the same state or metropolitan area

The MEP sponsor cannot be a bank, trust company, insurance issuer, broker-dealer, or other similar financial services firm (including recordkeepers and third-party administrators), nor be controlled by such an entity or an affiliate or subsidiary of such an entity, unless it participates in the group or association as a member employer.

Examples of a bona fide employer group or association would be a local chamber of commerce or a trade association. Working owners (as defined  in the proposed regulations) are permitted to participate in a MEP sponsored by a bona fide group or association of employers, even if they are the business’ only employee.

A bona fide PEO is an organization that acts indirectly as an employer on behalf of multiple unrelated businesses. It must perform at least one substantial employment function on behalf of client employers and must serve as the ERISA sponsor, the ERISA administrator, and as a named fiduciary of  the MEP. Substantial employment functions include such activities as assuming responsibility for payment of wages; withholding and remittance of taxes; provision of workers’ compensation coverage; recruiting, hiring and firing workers; determining compensation levels; supervising work; etc.

In addition to the proposed DOL regulations, MEPs have recently been the subject of numerous legislative proposals. For example, the House recently passed the Family Savings Act of 2018, and it is now being considered by the Senate Finance Committee. This act, like many other legislative proposals, would allow open MEPs sponsored by a “pooled plan provider” to enjoy the same benefits as closed MEPs, and would do away with the “one bad apple” rule mentioned above. These types of changes could dramatically change the MEP landscape and could make MEPs an even more attractive option for small businesses or businesses that don’t want the headache of sponsoring their own retirement plan.

It is not clear when the proposed DOL regulations may be finalized, nor when or if any of the legislative proposals will ultimately be signed into law. But, there is no need to wait. Even in the absence of final regulations or law changes, both closed and open MEPs can offer significant current advantages to small businesses.

Contact Us

Newport Group has experience with MEPs, having provided service to more than 100 open and closed MEPs. We can work with you to establish a MEP for your clients, and serve as its administrative services provider. For more information, contact your Newport Group representative or visit us at

A Comparison of Closed and Open MEPs

  Closed MEP Open MEP Comments
General Description A multiple employer plan (MEP) is a plan maintained by a group of employers, some or all of whom (i) do not have sufficient common  ownership to form part of a controlled group (common ownership of 80% is generally required), and/or (ii) do not-constitute an affiliated service group. To be a Closed MEP, participating employers must have sufficient commonality, i.e., a pre-existing, employment-based relationst4 that  is unrelated to the provision or benefits, and must  exercise control over the plan, either directly or  indirectly. Also, to be a MEP, all of the assets held in the trust must be available to pay benefits to any participant in the pion. An Open MEP is the same  as a Closed MEP, except that participating employers do not have sufficient commonality (i.e., no pre-existing employment-based relationship that is unrelated to the provision of benefits). There is bath pending  legislation (e.g., HR 6757,  the Family Savings Act of  2018) and administrative  guidance (e.g., proposed  regulations submitted by the  Deportment of Labor to the  Office of Management and  Budget) that could change the  MEP rules described herein.  The contours/language of  the proposed regulations  are not yet known. HP 6757  was passed by the House on  September 27 2018, but is  not expected to be acted upon  by the Senate. To the extent proposed  legislation could change the rules described in this chart, it is rioted below.
Roles of Contracting Parties A designated lead employer (LE)-usually the prornotor of the MEP, such as a Professional Employer Organization-is the primary named fiduciary and the official plan administrator for  the plan (unless the LE appoints on individual or  committee to serve as administrator). The LE is the  entity that determines the basic provisions of the plan, appoints a trustee or administrator, establishes     a funding policy for the plan, and ensures other plan fiduciaries are serving competently. The LE  is the only entity that can amend the standard  provisions of the plan or terminate the plan in its  entirety. Unless the LE appoints a separate plan  administrator, it would perform all administrator functions (e.g., determining eligibility, interpreting plan provisions, deciding claims disputes, appointing agents or service providers, providing required communications to participants, filing 5500s, etc.) The LE is basically serving as a 3(16)  fiduciary for each of the participating employers. Participating employers adopt the plan by executing participation agreements. They are responsible for initially determining the arrangement with the LE is reasonable and prudent, that the LE is competent to serve as the plan administrator for the MEP. and for monitoring the LE's ongoing performance. Same as Closed MEP  
Fiduciary Liability The LE bears the primary fiduciary risk, as it is the plan administrator under ERISA and responsible for making discretionary decisions regarding the  operation of the MEP. Participating employers also  bear some risk by ensuring the LE is competent, that the investments it offers are prudent, and by ongoing monitoring of the LE.   Same as Closed MEP HR 6757 codifies these responsibilities
Cost Efficiencies The costs borne by participating employers may be lower than the costs each employer would incur by sponsoring its own plan (e.g., a single Form 5500  and audit for the MEP as a whole rather than one  for each participating employer, an aggregate fidelity bond limit, economies of scale to negotiate administrative pricing, etc.).   Any cost savings are generally based on economies of scale     to negotiate administrative pricing, etc. A separate  form 5500 and audit (if  applicable) is required for each participating employer, and bonding rules are separately determined for each participating employer.  
Plan Design Constraints The LE chooses the design of the MEP. It may, if it so chooses, give par participating employers options with respect to specified plan provisions (e.g., what the match formula will be, etc.) Only the LE has the authority to amend the plan. Same as Closed MEP  
One Plan, or Multiple, under ERISA One. Only one Form 5500 is filed, audit rules are based on the assets and participants in the MEP as a whole, and bonding requirements are calculated based on the MEP as a whole. Multiple. Each participating  employer must file a separate Form 5500, must determine audit rules based on its portion of the MEP, etc. HR 6757 would permit Open MEPs with a “pooled plan Provider” to file a single 5500, etc. See below for more details.
Funding Arrangements A single trust document is used to invest all of the assets of the MEP. Requires that each unrelated employer establish a separate trust.   
Eligibility and Vesting service All covered service and all contiguous non-covered service with all participating employers mast be recognized by each participating employer for purposes of eligibility and vesting. Covered service means service with a participating employer while employed in a class of employees eligible to participate in the plan. Non-covered service means service with a  participating employer while employed in a class of  employees not eligible to participate in the plan. Contiguous non-covered service means non-covered service that is immediately preceded or followed by covered service with the same employer. Same as Closed MEP  
Benefit Accrual Service Covered service (but not contiguous non-covered service) with all participating employers must be recognized by each participating employer for purposes of benefit accrual. Same as Closed MEP  
Exclusive Benefit Contributions and forfeitures can be allocated to employees of all participating employers. For Code purposes, contributions and forfeitures can be allocated lo employees of all participating employers. However, under ERISA, such  a practice likely violates the exclusive benefit rule of ERISA Section 404(a)(1)(A).  
415 Limits All contributions from all participating employers are aggregated when performing 415 testing.  Unless the plan document provides otherwise, all  compensation from all participating employers is  also taken into account for 415  testing purposes. Same as Closed MEP  
Coverage, Non-Discrimination and Top-Heavy Testing The portion of the MEP covering each unrelated employer is tested as though it were a separate plan for coverage, discrimination and top-heavy testing purposes, including for purposes of identifying highly compensated and key employees. Same as Closed MEP  
Compensation Limits The compensation limit under Section 401(a)(17) is determined separately for the portion of the MEP covering each unrelated employer. Same as Closed MEP  
Minimum funding and tax deductions Except with respect to non-electing plans established prior of January 1, 1989, minimum, funding and  deduction limits are calculated separately for each unrelated employer. (Only defined benefit and money purchase plans ore subject to minimum funding rules.) Same as Closed MEP  
Disqualification The failure of any participating employer to satisfy the rules applicable to qualified plans    jeopardizes the qualified status of the plan for all    participating employers. Requires that each unrelated employer establish a separate trust. HR 6757 provides that the  qualified status of a Closed  MEP, and the qualified status  of an Open MEP that has a  "pooled plan provider," will not be jeopardized by the  failures of a participating  employer, provided that  certain conditions are met. A pooled plan provider is a  provider that is designated  as a named fiduciary and plan administrator in the MEP  document, registers with the  DOL as such, and satisfies various other requirements.
Terminations and partial terminations When determining whether a termination or partial termination occurs, and whether full vesting it required, each participating employer is examined separately. Same as Closed MEP  

Newport Group and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before making any decisions. 699912 (12/2018)

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