Opening Up Multiple Employer Plans to Small Employers

• Under existing law multiple employer plans must be limited to employers that are in some way related, for example employers in the same industry.

• The SECURE Act effectively removes this requirement by allowing for what it calls “pooled employer plans” (PEPs). These are multiple employer 401(k) plans sponsored by a financial institution, a record-keeper or other type of organization offered to any number of unrelated employers.

• PEPs are meant to appeal to small employers because the economies of scale is intended to reduce costs and because these plans will have a single plan document, single 5500 and a single plan audit. These tasks will be handled by the sponsor of the PEP rather than each adopting employer. However, a straw poll of providers indicates recordkeeping costs may not be much lower than individual plans and investment expense will not be lower in the early, and initial growth, stages of PEPs until a PEP reaches scale, which could take considerable time.

• The Act makes it clear that the “one bad apple rule” does not apply. In other words, a violation of a tax qualification rule by one member of a PEP does not disqualify the entire PEP. The assets of the noncompliant member must be spun off into a separate plan.

• This is an attempt by Congress to encourage small employers to establish retirement plans. Past attempts such as SEPs and simple IRAs have had only a modest impact. The pooled plan concept may have more success if some of bigger players in the industry view establishing a PEP as a business opportunity and market it aggressively.