Expanding Retirement Plan Options for Small Businesses

A new final rule from the U.S. Department of Labor (DOL) clarifies some of the ins and outs of multiple employer plans (MEPs). These are defined contribution retirement plans — such as 401(k) plans — that are sponsored by an association or employer group on behalf of member employers.

Clarifying the Rules

Existing DOL rules already allow MEPs to exist. And the new rule, which goes into effect on September 30, 2019, was designed to “clarify and expand the circumstances under which U.S. employers … may sponsor or adopt [MEPs].”

Among other requirements, groups and associations of employers that sponsor MEPs can have as members either:

• A group of local businesses (for example, a chamber of commerce), or
• An association of businesses within the same industry, regardless of location.

PEO Guidance

The most significant feature of the new rule is its roadmap for professional employer organizations (PEOs) to sponsor MEPs. PEOs assume the primary legal obligations of an employer, then lease its employees to companies that put them to work under contract with the PEO.

The final rule differs from the proposed version with respect to a PEO’s eligibility to sponsor MEPs. Specifically, the regulations provide a four-part “safe harbour” test.

1. The PEO is responsible for paying wages to employees, without regard to the receipt or adequacy of payment from those clients.
2. The PEO takes responsibility to pay and perform reporting and withholding for all applicable federal employment taxes, without regard to the receipt or adequacy of payment from those clients.
3. The PEO plays a definite and contractually specified role in recruiting, hiring and firing workers, in addition to the client employer’s responsibility for recruiting, hiring and firing workers.
4. The PEO assumes responsibility for, and have substantial control over, the functions and activities of any employee benefit that the PEO is contractually required to provide, without regard to the receipt or adequacy of payment from those client employers for such benefits.

The tests are designed to ensure that a company representing itself as a PEO acts as a bona fide employer, and bears responsibility for employee benefits, including an MEP-style plan.

Open MEPs

The new rule does not include a provision that would allow an association to open its membership to businesses of any industry sector in any part of the country to join. Such an entity would be called an “open MEP” or a “pooled employer plan.” Instead, the final DOL rule asks stakeholders to offer their ideas on several regulatory questions around open MEPs. Responses are due by October 29.

A new federal law would be needed to throw open the gates to open MEPs. In fact, proposed legislation — the Setting Every Community Up for Retirement and Enhancement (SECURE) Act — facilitating open MEPs passed in the House in May 2019. But the opposition has held the bill back so far in the Senate.

Fiduciary Liability

Joining an association or PEO that sponsors an MEP can help eliminate a significant portion of the fiduciary liability associated with retirement plan sponsorship — but not all of it. For example, the entity that sponsors the MEP is held responsible for fulfilling the basic legal requirements of running the retirement plan. However, as an employer, you’re responsible for choosing an MEP wisely to safeguard your employees’ interests. You also must watch how the MEP is performing overall.

Additionally, individual employers participating in the MEP must satisfy anti-discrimination requirements. Those rules apply to all ERISA plans. They’re intended to ensure that benefits aren’t skewed towards higher-paid employees at the expense of the lower-paid ones. The MEP administrator would perform the discrimination testing for you. But if you fail, it’s up to you to remedy the situation.

Beware: Even though you’re compliant with the antidiscrimination rules, you could still have problems. How? If one or more employers participating in an MEP are violating the rules, the entire plan could be disqualified.

Right for Your Small Business?

If you currently aren’t sponsoring a retirement plan — or you’re unhappy with the cost of your existing plan — an MEP might be a good solution. Also, if the SECURE Act becomes law, you might have more MEP options to choose from. Contact your financial advisor to determine what’s best for your situation.

The idea behind multiple employer plans (MEPs) is simple: When negotiating fees with retirement plan services companies, there’s strength in numbers. Fixed costs associated with managing a 401(k) plan make the average cost per plan participant higher for smaller employers than for large ones.

In fact, the average fee charged to plans with fewer than 100 participants is nearly 50% higher than that of larger plans, based on total fees’ percentage of plan assets, according to the 401(k) Book of Averages.

Besides direct plan administrative costs, reasons that small employers choose not to sponsor retirement plans include the amount of time it would take them to deal with the paperwork, plus the risk of litigation if things go badly with the plan.

Although MEPs can help employers lower the average cost per participant, it’s important to look beyond cost when deciding on a retirement plan. Employers should also consider the simplicity of outsourcing plan administration and sharing fiduciary responsibilities with the plan sponsor. Contact your financial advisor to discuss which options are available to you and what’s right based on your situation.