Most businesses today need to offer a solid benefits package. Failing to do so could mean falling behind in the competition to hire and retain talent in today’s tight job market.
Embarking on the journey of exploring Pooled Employer Plans (PEPs) is a strategic move for businesses aiming to enhance their retirement benefits. PEPs, a variant of Multiple Employer Plans (MEPs), redefine the landscape of qualified defined contribution plans, particularly 401(k)s, maintained collaboratively by two or more employers. Unlike traditional MEPs, PEPs present a solution to common challenges. They sidestep the commonality-of-interest requirement and eliminate the looming threat of the "one-bad-apple" rule. PEPs are structured to function as single employer plans for reporting, audit, and compliance purposes, irrespective of whether participating employers share common interests. While offering advantages such as cost savings and shared fiduciary responsibilities, PEPs come with certain limitations, such as limited flexibility in plan customization. As businesses consider the leap into PEPs, it is crucial to weigh the benefits against potential drawbacks, seeking guidance from professional advisors to navigate this innovative approach to retirement planning.
Meet the MEP
PEPs are a variation on an existing retirement plan model: multiple employer plans (MEPs). MEPs are qualified defined contribution plans, typically 401(k)s, maintained by two or more employers. MEP sponsors may be one of the participating employers or a third party, such as a trade association or professional employer organization.
MEPs offer several advantages. Group purchasing power and other economies of scale tend to lower plan sponsorship costs. Also, participating employers avoid time-consuming and often disruptive administrative tasks. Plus, they can shift some — though not all — of their fiduciary duties and liability exposure to the MEP sponsor.
MEP sponsors are responsible for plan design and day-to-day management. This includes:
- Coordinating with various third-party service providers,
- Handling compliance issues, and
- Overseeing annual audit and reporting requirements.
Sponsors can also provide participating employers with access to expertise and advanced technology that the participants might otherwise be unable to afford.
MEP drawbacks
However, traditional MEPs have some drawbacks. For one thing, to be treated as a single employer plan for reporting, audit and administrative purposes, a MEP must be “closed.” That is, its members must share some “commonality of interest,” such as being in the same industry or geographical location.
Employers that join “open” MEPs, which don’t require a commonality of interest, are treated as if they maintained separate plans with their own reporting, audit and other compliance responsibilities. (Note: Certain smaller plans — generally, those with fewer than 100 participants — aren’t subject to audit requirements.)
Another drawback of traditional MEPs is the “one-bad-apple” rule. Under this rule, a compliance failure by one participating employer can expose the entire MEP to the risk of disqualification.
PEPs step up
Properly designed PEPs avoid both the commonality-of-interest requirement and the one-bad-apple rule. PEPs are treated like single employer plans for reporting, audit and other compliance purposes — even if they allow unrelated employers to join. One participating employer’s compliance failure won’t jeopardize a PEP’s qualified status so long as the plan contains certain procedures for dealing with a participant’s noncompliance.
PEPs are available from “pooled plan providers,” which include financial services companies, insurers, third-party administrators and other firms that meet certain requirements. Although PEPs eliminate some of the obstacles that make traditional MEPs impractical for many companies, they’re not without disadvantages. For instance, PEPs have limited flexibility to customize plan designs or investment options to meet the needs of specific employers.
Also, while one of the advantages of PEPs is cost savings, they may increase one type of cost for some participants. That is, though small employers generally aren’t subject to annual audit requirements, PEPs are. So, small businesses that join a PEP will have to bear annual audit costs they otherwise wouldn’t. These costs can, however, be spread out among participants.
Dip your toes in
If you’re intrigued by the prospect of a PEP, dip your toes in slowly. Discuss the idea with your leadership team and professional advisors before you dive in. We’d be happy to help you estimate the costs and potential cost savings involved. If you have any questions please contact your Rudler, PSC advisor at 859-331-1717.
RUDLER, PSC CPAs and Business Advisors
This week's Rudler Review is presented by Joshua Myers, Staff Accountant and Rebecca Thorman, CPA, CVA.
If you would like to discuss your particular situation, contact Josh or Becca at 859-331-1717.
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