Multiple employer plans (MEPs) will be expanded if the Senate passes RESA, its version of the House’s SECURE Act. Under these bills, a new class of MEP service provider will be able to create and offer pooled MEPs.
As currently configured, MEPs allow small employers access to large 401(k) plans. The new legislation would:
- eliminate some regulatory barriers,
- improve the quality of MEP service providers, and
- allow MEPs to adopt IRA-based plans.
The House passed the Setting Every Community Up for Retirement Enhancement (SECURE) Bill of 2019 (HR 1994), on May 24, 2019. The nearly identical Senate bill is called the Retirement Enhancement and Savings Act (RESA). Changes for IRAs and 401(k)s were discussed in earlier posts.
Current Treatment of Multiple Employer Plans
A MEP is a single plan with adopted by multiple unrelated employers. Multiple employer plans under IRC §413(c) can be structured in one of two ways:
- as an open MEP where an organization with employees takes the lead by establishing the plan for its own employees, and has other unrelated employers join the plan as co-sponsors;
- as a closed MEP in which a group or association of employers that meets a commonality requirement takes the lead in establishing the plan, and members are free to adopt it.
Open MEPs are often established by organizations that specialize in providing benefits for smaller employers.
Division of Compliance Responsibilities
Some qualification requirements are applied at the employer level and some at the plan level. Requirements applied at the plan level include:
- participation eligibility;
- exclusive benefit rule;
Requirements applying at the employer level include:
- top-heavy plans.
MEPs Distinguished from Other Plans with Multiple Unrelated Employers
IRC § 413 also provides rules for these types of qualified plans for multiple employers:
- collectively bargained plans, sometimes called “multi-employer plans” under IRC 413(b); and
- Cooperative and Small Employer Charity (CSEC) plans under IRC 413(d).
Noncompliant MEP or Single Employer Can Disqualify Every Employer
A problem with MEPs is that a noncompliant plan or a single noncompliant employer can render the entire plan nonqualified for all the employers.
Under IRS regulations, an MEP is disqualified for all employers when a qualification requirement is not met by:
one participating employer; or
the plan itself.
Limited Types of Plans
Another problem is that MEPs are limited to IRC 401(a) qualified plans. Although 401(k) plans are included, SEP IRA and SIMPLE IRA plans are not. IRA-based plans are easier and less costly and are designed to appeal to small employers.
New Legislation Would Insulate Compliant Employers and Allow Pooled Plans
Under the legislation, MEPS would not be disqualified merely because one or more employers of employees covered by the plan failed to comply with qualification requirements. This rule would apply to IRA-based plans with their requirements as well as qualified plans such as 401(k)s.
The new rule applies to:
- MEPs with a common interest other than having adopted the plan (i.e., closed MEPs), and
- Open MEPs if they have a “pooled plan provider.”
Transfer of Plan Assets in the Event of a Qualification Failure
To qualify for this protection, the terms of the plan must provide that in case any employer in the plan fails to comply with a requirement, the assets of the plan attributable to employees of the noncompliant employer are to be transferred to:
- a plan maintained only by that employer or its successor,
- an eligible plan, including an IRA, qualified plan, annuity, or eligible deferred compensation plan for each individual whose account is transferred, or
- any other arrangement that the Secretary of the Treasury determines is appropriate.
Liability of Noncompliant Employer
In addition, the plan must provide that a noncompliant employer is liable for liabilities with respect to the plan attributable to employees of the noncompliant employer
The plan or other employer in the plan will not be liable for the noncompliant employer’s failure to meet all requirements.
Pooled Employer Plans
A pooled employer plan is an individual account plan providing benefits to the employees of two or more employers. It can be either a qualified plan, such as a 401(k), or an IRA-based plan. It cannot be a plan maintained by employers which have a common interest other than having adopted the plan.
Pooled Plan Providers
A pooled plan provider is a person who is designated by the plan as:
- a named fiduciary;
- the plan administrator; and
- the person responsible to perform all administrative duties.
Administrative duties include duties which are reasonably necessary to ensure that:
- the plan meets any applicable ERISA, qualification, or IRA requirements, and
- each employer in the plan takes steps to stay in compliance with these requirements.
Such duties include conducting proper testing with respect to the plan and the employees of each employer in the plan.
A pooled plan provider must:
- register as a pooled plan provider with the Secretary of the Treasury, and provide required information before beginning operations as a pooled plan provider,
- acknowledge in writing that it is a named fiduciary and the plan administrator, with respect to the plan, and
- ensure that all persons who handle assets of the plan, or who are fiduciaries of the plan, are bonded in accordance with ERISA.
If a pooled plan provider fails to perform substantially all of these duties for any plan year, the Secretary may provide that the determination as to whether the plan meets the qualified plan or IRA requirements is to be made without regard to the protective rule.
In other words, the sins of one employer might be visited upon all employers.
By James Solheim, J.D.