Recent Legislation Created New Retirement Plan Opportunities for Small Businesses
Late last year, Congress enacted legislation that made saving for and planning for retirement a little bit easier. The Setting Every Community Up for Retirement Enhancements (SECURE) Act helped individuals and U.S. employers in several ways, including:
- Allowing certain part-time employees to be eligible for employer-sponsored retirement plans
- Removing the age limit on retirement contributions, which had previously been age 70 ½
- Making it easier for employers to offer annuities through workplace plans
- Allowing penalty-free withdrawals from retirement plans in certain instances
But small and medium-sized businesses were especially excited about a new retirement vehicle that the SECURE Act created: Pooled Employer Plans (PEPs). PEPs allow two or more businesses to pool their resources so that they can offer affordable retirement plans to their employees. PEPs are game changers for businesses, especially those who had been ineligible for Multiple Employer Plans (MEP) or found them too costly to maintain.
PEP or MEP – What’s the Difference?
PEPs and MEPs are similar in many respects. Employers have the freedom to create their own plans and choose their own investments, but they share the administrative burdens of operating a qualified retirement plan. Both PEPs and MEPs can offer defined benefit plans (like pensions) or defined contribution plans (like 401ks), and both must be sponsored and operated by a fiduciary. By allowing companies to utilize PEPs and MEPs:
- The plan fiduciary will have a wider selection of investments to choose from
- Employers can take advantage of high-volume pricing discounts
- The costs of administering a retirement plan can be spread among the participating employers
- Most importantly – more small businesses can offer retirement benefits to their workers
The biggest difference between PEPs and MEPs is how the Employee Retirement Income Security Act of 1974 (ERISA) classifies them. ERISA guidelines are much stricter on MEPs than PEPs.
MEPs have been around for decades. In general, employers participating in a MEP must file their own reports unless they meet certain criteria as defined by the regulations. In practice, it can be difficult to form a MEP that meets this criteria.
In contrast, PEPs are always treated as single plans. ERISA guidelines only requires one annual return and one audit (if needed) for each PEP.
More About PEPs
Any two or more unrelated employers can establish a PEP. Each PEP must be sponsored by a Pooled Plan Provider (PPP) who will file the PEP’s return, coordinate the audit, and act as the fiduciary for the plan itself. PPPs are often third parties like banks, law firms, or insurance companies. As the plan’s fiduciary, the PPP must make decisions that are in the best interest of the plan participants and beneficiaries even if that decision is unpopular among the employers. Other fiduciary responsibilities include:
- Monitoring investment performance
- Following the plan documents
- Complying with ERISA guidelines
- Diversifying plan investments
- Avoiding transactions that are conflicts of interest
- Keeping plan expenses reasonable
As the fiduciary, the PPP is also responsible for ensuring all employers participating in the PEP fulfill their individual obligations. If one employer in the pooled plan fails to satisfy their individual plan’s requitements, assets attributed to their participants can be transferred out of the plan and the PEP can continue to operate without penalty.
PEPs will become available to businesses in 2021. Businesses interested in forming or joining a PEP in 2021 should discuss their ideas with their business advisors to make sure they’ll be ready to make the shift when the time comes. Please reach out to our Meaden & Moore Advisors if you have questions about PEPs, MEPs, or any other retirement plan your business is considering. Contact us if you have any questions.