Among the more significant retirement plan-related changes in the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) are new provisions that expand the ability of small employers to pool together into a single plan.
Historically, many small employers have been deterred from establishing retirement plans due to the hefty costs required to set up and maintain a plan that may cover only a few employees. One potential solution has been to pool multiple employers together under a single multiple employer plan, or MEP, which has the dual effect of reducing administrative fees payable by each participating employer as well as giving the plan leverage to negotiate lower fees with investment providers.
Prior to passage of the SECURE Act, MEPs have seen only limited success in the marketplace because of certain legal restrictions on MEP maintenance and operation. Under a “common interest” rule, employers participating in a MEP were required to share an interest in common with fellow participants other than mere participation in the plan. To comply with this requirement, MEPs have generally been offered only to limited groups of employers, such as members of a common industry group or employers located within a narrow geographic area. In addition, employers participating in a MEP have historically faced additional risk of tax penalties due to the so-called “one bad apple” rule, under which the tax qualification of the entire MEP could be compromised if even one participating employer failed to take actions necessary to maintain the tax-qualified status of the plan (such as passing applicable nondiscrimination tests or the timely adoption of a required plan amendment).
The SECURE Act seeks to expand the adoption of MEPs in two ways. First, a new category of plan referred to as a pooled employer plan, or PEP, is created. PEPs are similar to MEPs, except that they’re not subject to the common interest rule. Thus, a single pooled plan provider may now establish a plan that is permitted to cover any employer in any industry group nationwide.
Second, the SECURE Act also eliminates the “one bad apple” rule. Employers participating in a MEP or PEP no longer have to worry that the tax-qualified status of the plan will be jeopardized due to the actions of other participating employers. In the event a given employer fails to take action to maintain the tax-qualified status of the plan, the MEP or PEP provider will have the ability to segregate the assets of the plan attributable to that employer into a separate trust or account to ensure that only that employer, and no other participating members of the plan, will be liable for any associated tax penalties or other costs of correction.
These provisions become effective for plan years beginning after December 31, 2020. Stay tuned for additional updates on the rollout of MEPs and PEPs, as additional guidance on these provisions is likely to be published during 2020.
Interested in learning more about the SECURE Act? Download the SECURE Act eBook from the Schneider Downs Retirement Solutions team for a full overview of provisions and highlights at www.schneiderdowns.com/secure-act-ebook.
Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.
