We interrupt our usual Benefits Dial programming – to take a closer look at developments affecting multiple employer plans (MEPs) as part of our series of posts on the recently enacted benefit plan legislation, including the SECURE Act (background here). The reform to MEPs is seen by many as the biggest disruptor to the retirement plan industry. Why? It facilitates the banding together of retirement plan assets from unrelated employers, helping employers punch above their weight. By combining together to form a larger plan, smaller employers can leverage assets with regard to plan services, and maybe most importantly, investment fees paid by participants.
MEPs have long been permitted but many employers have been unwilling to participate in those plans. The biggest deterrent has been the “one bad apple rule.” That rule provides that a defect in any participating employer’s portion of the MEP can impact the tax qualification of the entire MEP for other participating employers. In other words, if one participating employer in the MEP is unwilling (or maybe unable) to correct an error, the whole plan can be disqualified by the IRS. The SECURE Act helps solve this issue with a special kind of MEP called a pooled employer plan (PEP). PEPs have a specific procedure for dealing with tax qualification defects. In short, a participating employer in a PEP who refuses to correct the error, can be discharged (spun off) from the PEP to isolate the disqualification impact. The SECURE Act grants relief under ERISA to boot. Historically, MEPs were treated as a collection of separate plans unless the underlying employers met a commonality standard. A PEP (called a “Group of Plans” under ERISA) is also treated as a single plan for ERISA purposes under the SECURE Act. This means, for example, that such plans would be allowed to file a single Form 5500.
To participate in a PEP, however, the employer is going to have to cede some control over and involvement in the retirement plan. PEPs are required to be offered by a “Pooled Plan Provider” or PPP. The PPP must be the PEP named fiduciary and PEP plan administrator – traditionally roles held by the employer. The PPP is also responsible for ensuring that the plan meets requirements of the tax rules and ERISA and must register with the IRS. We note that the one bad apple rule could still potentially apply to a PEP if the PPP does not perform substantially all of its administrative duties.
2020 should be a whirlwind year for PEPs as the rules are slated to go into effect in 2021. While we anxiously await regulatory guidance, we will be closely following how the industry responds to the new law. Which providers will pursue this new market? What size plans will be targeted by providers? How will providers restrict PEP plan design among participating employers (within the regulatory framework)?
Finally, some theorize that the impact of these rule changes won’t be limited to just small plans. While large plans do not have as much to gain from an investment fee reduction standpoint, those employers may see PEPs as an opportunity to mitigate fiduciary risk associated with the plan and/or less involvement in the plan.