Jan 3, 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.
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.
The 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.
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 newportgroup.com.
A Comparison of Closed and Open MEPs
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)